What's happening in China

 

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How China's demand reached critical mass to effect a global ecommerce revolution

Talk of the potential of China's ecommerce market these days, and those involved will likely salivate contemplating mouth-watering prospects.

Indeed, the facts are impressive. For starters, China has now surpassed the US as world's biggest retail market with domestic sales having reached US$4.88 trillion a year against America's of $4.82 trillion.

Chinese logistics operators, of which there are now many more, are building new distribution networks to handle the expanding trade. Fengqu.com is typical of these spin-offs, this one from Shenzhen's SF Express.

Fast growth and rising competition are spurring alliances and new strategies. Tmall Global has attracted major foreign retailers, such as US-based Costco and South Korea's Lotte Mart, to its cross-border site.

Amazon not only recently opened its offshore shopping sites to Chinese consumers, but also offers users of its Chinese site (Amazon.cn) a list of selected foreign products with Chinese-language descriptions and specifications.

China is today without question the world’s biggest online retail market, with internet sales topping $899 billion or 47 per cent of digital retail sales worldwide.

US investment bank Goldman Sachs sees a booming market for the next four years. Its report pegged Chinese ecommerce sales at $750 billion in 2016 sales alone, coming from 460 million online shoppers, and projects 23 per cent growth through 2020.

Driving mainland growth is Alibaba.com, and JD.com - China's first and second biggest ecommerce companies. Each and many other operators are building networks of warehouses and systems to cope with "last mile" problems to deliver goods to the millions who live in third and fourth tier urban centres, whose populations frequently run into the millions.

To deal with this, China has borrowed from America's "four corners" supply chain strategy, adopted by big box retailers years ago to cope with changing needs. They decided to stock warehouses generously in America's four corners, the north east, the south east, the south west and the north west at a time when bunker prices were high and ocean shipping was focused on cutting costs through slow steaming.

This meant abandoning the then popular Just-in-Time (JIT) logistics practice in the face of the global economic downturn. The new idea, more recently adapted to Chinese needs was to stock warehouses, or "fufillment centres", to make ready a wide variety of stock keeping items within in express delivery range of - not to retail outlets this time, but to end-use consumers.

Nearly 25 per cent of all ecommerce sales in China are and were apparel, footwear and accessories, with Alibaba as the biggest seller. Another 20 per cent is electronics and appliances where JD.com and Alibaba's Tmall each have a 40 per cent.

As China is one of the most - if not the most - developed ecommerce markets in the world, New York-based eMarketer expects digital purchases will represent a globe-topping 18.4 per cent of the country’s total retail sales this year, topping $2.41 trillion in 2020, as it grows by double digits every year.

Yet virtually no foreign internet company has succeeded in exploiting this bonanza. US retailer Macy's announced that it will launch an ecommerce site in China in this year, but the big question remains: Will this world renoun New York brand falter and go the way of ecommerce giant eBay and Amazon, which failed gain the traction expected to make the China trade the success they anticipated?

Helen H Wang, who writes for Forbes magazine about China's middle class and consumer trends, feels the problems faced by American and European e-tailers, arise from their failure to understand an differing commercial terrain in mainland China.

Ecommerce in China is fundamentally smartphone-based, she says. According to Bloomberg, the country has more than one billion smartphone users. Nearly 90 per cent of Chinese shoppers purchase items via mobile phones. Many Chinese simply bypass the personal laptop or desktop computer altogether and go to mobile phones directly, often never having a landline of their own, regarding as outmoded and of an older generation.

Since ecommerce in the west started in the PC era, many functions on ecommerce sites are PC-centric. Mobile applications often have limited capabilities and merely a complementary tool to the full website. This attitude does not suit the Chinese mainland market, she says.

As Ms Wang sees it, companies must have a mobile-first strategy, redesign their ecommerce sites with sophisticated mobile capabilities, and ensure a smooth shopping and checkout experience entirely on mobile applications.

Unlike in the west, PC-based websites can be a complementary offering to mobile commerce. A McKinsey report indicates that people with multiple devices such as a smartphone, a tablet and a laptop spend 17 per cent more on ecommerce than their mobile-only peers.

Today, we also find disruptive technologies, or people who use them disruptively. For example, a junior in our office, who has since moved on to better things, became noticeable to her colleagues when various gift products arrived handsomely packaged and delivered by handsome, smartly uniformed messengers.

Unbeknownst to her colleagues, she had become a minor star as a restaurant reviewer of affordable lunch counters in downtown Hong Kong, frequented by her fellow office workers, using no more than her ordinary mobile phone and its camera to post her pictures and thumbnail reviews online.

Such people, known as "key opinion leaders," or KOLs, have become influential bloggers and celebrities with followers in the, thousands even millions. Some well-known brands, such as Gucci and Louis Vuitton, have experienced tremendous successes with KOLs.

For brands to survive in a highly competitive market, companies need to learn to use the influence of KOLs and social media to communicate with customers and build loyalty, according to Ms Wang.

Unlike America, where Amazon and Facebook are distant from one another, China's ecommerce is closely linked to social media sites such as Weibo and WeChat.

A recent survey by KPMG indicates that more companies are using data and analysis (D&A) to interpret consumer behaviour and predict trends. Baidu, Alibaba and Tencent, so-called BAT, have the most valuable data sources and multinationals are using BAT data to secure customers.

Of course, much vaunted Asian millennials, the demographic most sought after, and most at home with ecommerce, want access to foreign goods because the choice is wider, and as such, likely to produce top quality. This creates problems in China, where foreign purchases are discouraged in a land where what is not expressly permitted tends to be forbidden as opposed to the west which permits all that is not forbidden.

Broken down to its essentials, it means Alibaba and JD.com, the two mainland ecommerce giants, tend to sell ordinary, if not second rate goods because they are largely domestically sourced, and if foreign, of such low quality or highly priced as not to pose too great a threat to domestic producers.

But as rising demand for foreign products continues, and as incomes rise in China, consumers increase purchases of imports. Now, impatient for the latest and greatest, at the best available price, Chinese consumers find ways to buy directly from foreign retailers and suppliers at the click of a mouse or a swipe at the screen.

According to a McKinsey & Company report, cross-border consumer ecommerce amounted to an estimated CNY259 billion (US$40 billion) in 2015, more than six per cent of China's total consumer ecommerce, and it's growing up to 50 per cent annually.

Alibaba's Tmall has moved into the market with a cross-border site (Tmall Global) as have rivals and start-ups, while US ecommerce leader Amazon is still active in China, said the report.

Overseas imports purchased through such channels, moreover, are often expensive: for example, baby formula from overseas, popular with affluent Chinese parents, often costs up to twice as much as the same product in the United States or Europe.

Shoppers on cross-border ecommerce sites also feel a degree of protection from fake or counterfeit goods that often pass for offshore brands, particularly in China, where counterfeiting is a long-standing and robust industry.

To combat this, and the tendency towards consumer smuggling, eight Chinese cities have established trade zones qualifying for this tax regime, with more likely to do so, as ecommerce players move to speed up customs clearance.

Evidently aware of its limitations in its home market Alibaba has now extended its reach creating a loyalty programmes for online shoppers in Singapore that it may expand into other markets, teaming up with Uber Technologies and Netflix to lure customers.

It's the first time Uber and Netflix have jointly created an online rewards programme, said Maximilian Bittner, chief executive officer of Lazada Group SA, the Singapore-based ecommerce operator Alibaba acquired for $1 billion in 2016.

Consumers pay S$28 (US$20) a year to get benefits such as six months of Netflix streaming, discounts on Uber rides and free delivery on Taobao or Lazada purchases. A mobile app will be rolled out in the second half of the year, reports Bloomberg.

"Singapore is the market on the cutting edge of validating what we think consumers might want, so we will focus on Singapore first,” said Mr Bittner, who expects to add more partners.

Faced with the prospect of Amazon making a big push into Southeast Asia, Lazada has been seeking ways to defend its slice of the region’s ecommerce market.

One thing is clear: The enormous ecommerce market will grow bigger and tranform, indeed transmogrify retailing. And it has all come about in Asia where the Chinese demand and its critical mass came together to effect what clearly amounts to revolutionary change. And with that, one only expect a correspondingly huge impact on logistics and shipping worldwide.

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