China’s internet companies in social media and ecommerce are surely eager for attention. Not too long after Weibo went IPO on Nasdaq [NASDAQ: WD], the market has been turning its head towards China’s ecommerce giant Alibaba, in what could be a bigger IPO than Facebook, valued at US$168 billion.
Headlines are all well and good, but I will get into a few intricate details behind why ecommerce works in China.
There is no doubt the Chinese business-to-customer (B2C) market is huge. Currently, China has 560 million internet users (twice as big as the US market). Chinese internet users spend an average of 20 hours a week online.
This is just the beginning.
China has 1.35 billion people; the urbanisation rate is at 51%. This means the penetration rate is at 42%, and a little below the urbanisation rate.
I guess you’re getting my drift. China’s internet penetration rate tracks its urbanisation rate. This means only one thing. Connectivity will quickly reach the third and fourth tier cities, and I suspect this to be at an increasing speed.
This is because you only need electricity, smart phone dealers and telco coverage for people to get connectivity.
China’s literacy rate is 95.1%, meaning people of developing regions are ‘internet ready’; and China’s state-owned telcos will be ‘sent’ (by Beijing) to set up coverage in developing regions before anything else happens. In terms of broadband speed, China will match the US in 2015 (20Mbps).
This is very much the sight if you take the Line1 subway in Beijing. This line is the oldest subway line in China. It’s beneath Tiananmen Square and rolls along in a straight line cutting Beijing from the West to the East. This line is utterly crowded with tourists wanting to go to Tiananmen Square. The tourists are mostly Chinese from the outer Chinese provinces.
Judging from their clothes, you can tell they are not bankers and lawyers; perhaps, they have arrived from some faraway village. Their skin tone is somewhat darker than that of a typical Beijinger; they speak their local dialects.
Despite your inner unease about them talking too loudly, there is the great equaliser between ‘us city folks’ and ‘them country men and women’, they are holding smart phones!
So this is the future you need to expect for China. Mobile devices with connectivity through the internet, social media and ecommerce (along with gaming, entertainment, news etc) find their ways to developing regions in China. This is a story you need to invest into.
You have surely heard about China’s exploding online retail sales on such celebrative days as Singles day, Funerals day and Christmas. Yes, the Chinese are certainly a joyous bunch and the fact that there are very few Christians in China makes Christmas an odd holiday to have. Nevertheless, these are key dates for retailers and they make a fortune on these days.
One thing that makes ecommerce very different in China than it is in the West is the delivery model. You may have heard about Amazon.com’s [NASDAQ:AMZN] plan to send flying drones for goods delivery in the future. It may strike as odd, but from a Chinese perspective, it makes perfect sense.
Everything you buy online in China is delivered to your door either free of charge or for a tiny fee. This makes the ecommerce model work in China.
My friend, who was pregnant a few years back, was living in Shanghai. She once told me that she did nothing but shop online everyday during her pregnancy. She usually bought food, clothes and baby stuff from online retailers such as Tao Bao (the biggest B2C retail platform, under Alibaba) and Jing Dong (JD.com, currently filing for an IPO in the States). The goods would then be delivered to her.
There is a whole ecosystem in the delivery man’s business in China. Companies firstly package the goods, then send the goods by cheap labour (guys who have come to work in big cities on minimum wages), and they all drive low cost scooters (further lowering delivery costs).
Delivery isn’t limited to small goods. In fact, delivery companies can handle and deliver any size of product.
Delivery isn’t limited by geography either, meaning when you open your search bar in Tao Bao, you can source from all over China, and have goods delivered to you via lower cost delivery.
So you have a number of factors making ecommerce work in China: 1) low cost online retail that lowers the cost of otherwise having to run a physical store (having a physical store that doesn’t sell branded, high value goods is suicide in China); 2) ultra low cost of delivery; and 3) online payment systems.
There are a variety of online payment systems in China. These systems have copied the American ecommerce model. Credit cards are run by banks and credit card companies, direct debit through online banking systems, and payment systems similar to Paypal, namely the formidable ZhiFuBao (under Alibaba) and Paypal itself.
The customer experience is great. You can find the best bargains, varieties and shops on China’s B2C ecommerce platforms. And refunds are acceptable. The marketplace is regulated by the companies who run the platforms. The marketplace is also regulated by ratings and reviews, so you can buy from creditworthy sellers.
In essence, having your groceries delivered to your door every day (referring to an online retail platform run by COFCO, one of the largest SOEs in China) changes you as a person.
Never mind the potential of this market; I will talk more in-depth about social media companies versus ecommerce companies in future instalments. There are a few more nuances in this space, and it’s important to identify the best opportunities in a huge and diverse market.
Ken Wangdong
Emerging Markets Analyst
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