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The evolution of China’s E-commerce marketplaces

Strategy

China is the world’s largest e-commerce market.  The number of online shoppers in China surpassed 417 million in 2015, hitting US$590 billion in online retail transactions. Not only has online shopping grown more than 12 times over the past five years, e-commerce contributed almost 30% of China’s GDP growth in 2015. With online sales growing at a rate of over 50% per year, it’s no wonder every economy in the world is analysing China’s booming e-commerce industry, with a hope of tasting a slice (or two) of the growing pie.

E-commerce is a complex and sprawling jigsaw puzzle, with subgenres like cross border e-commerce that are of particular interest to New Zealand. There are other variables, such as B2B (business to business), B2C (business to consumer), B2B2C (business to business to consumer), C2C (consumer to consumer), m-commerce (mobile commerce: the buying and selling of goods and services through wireless handheld devices), x-commerce (where e-commerce meets social media and location services), and internet celebrity economies (where cyber personalities become their own brands and launch successful e-commerce models) that make this industry multifaceted. These diverse trends make it difficult to keep on top of developments in this fast moving industry.

However the size and scale of e-commerce in China, as well as the speed of developments, suggest it’s worth making the effort to do so given potential opportunities for New Zealand business to access China’s billion-plus consumers through this channel.

China’s e-commerce environment is in a state of constant flux, with new players entering and exiting the arena as regulations change and as consumer demands grow and develop. At the same time, just a few key players in China’s e-commerce scene make up the vast majority of market share.

For example, in the B2C portion of the industry, just two players (Alibaba’s Tmall with 57.7% and JD.com with 25.1%) make up over 80% of the digital retailing market. Suning.com, VIP.com, Gome, and Yihaodian (YHD.com) come in respectively at third to sixth place, each with a significantly smaller share of the market.

Alibaba Group
The Alibaba Group, headed by Executive Chairman Jack Ma, is the parent company of Tmall. Understanding the scale and reach of Tmall requires also understanding its founder and its numerous sister platforms and services.

Jack Ma
Alibaba Group founder Jack Ma, a former English teacher, is known for his charismatic stage presence and his pro-youth, pro-feminist, pro-SME, and pro-“borderless trade” leanings. In a recent interview, he mused, “I failed three times in college. When KFC came to China for the first time, we were 24 to apply and I was the only one dismissed. I wanted to [become a policeman] but I was the only one not accepted. I applied ten times to Harvard University and was rejected.” Ma cites these previous failures to illustrate the tenacity that led to his eventual entrepreneurial success.  They also illustrate the possibilities available to Chinese entrepreneurs with a vision and some persistence.

Ma is now the second richest person in China and according to Forbes, was the 22nd most “powerful” person in the world in 2015. In 2014, his conglomerate, the Alibaba Group, recorded the largest ever initial public offering (IPO) in the New York Stock Exchange, with a value of more than US$25 billion.  Ma has great ambitions for the Alibaba Group, noting his expectations for transaction volumes on Alibaba platforms to surpass US$900[1] billion by 2020. His goal is for Alibaba to become the “fifth largest global economy” by 2020. Ma met Prime Minister Key in April this year in Beijing.

Alibaba.com
In 1999, Ma launched the first business of the Alibaba Group, the English-language Alibaba.com in Hangzhou with the aim of helping SMEs find customers and suppliers without going through costly middlemen. Today, Alibaba.com is a B2B online platform for global wholesale trade, connecting millions of buyers and suppliers from over 260 regions around the world.

1688.com
That same year, Ma launched an equivalent B2B online platform called 1688.com (pronounced “yao-liu-ba-ba” in Chinese, a similar sound to “Alibaba”) for the Chinese domestic market, connecting domestic retailers with domestic wholesalers. Many Chinese merchants on Alibaba.com source their items cheaper on the domestic 1688.com and then add a margin for on-selling to international buyers on Alibaba.com.      

AliExpress
Despite the success of Alibaba.com and 1688.com, Ma felt there was a gap in the online wholesale marketplace for low quantity products at factory prices. With that, AliExpress was born, providing international buyers the ability to purchase smaller quantity orders (as low as one item) from Chinese wholesalers online.

Taobao
Following the success of his B2B online platforms, Ma launched Taobao in 2003, offering a C2C marketplace where individual Chinese could sell to other Chinese (similar to New Zealand’s TradeMe). Taobao is now China’s largest C2C online shopping platform, and home to many “daigou” sellers (literally “buy on behalf of”) – i.e. overseas Chinese who buy (mostly infant formula, health and luxury) products on behalf of domestic Chinese and post/deliver them to China. Chinese consumers tend to use “daigou” to purchase luxury items (often 20-30% more expensive in China than overseas), as well as health and baby food products, which are thought to be safer and more trustworthy if purchased from overseas.

In April this year, new tax regulations were introduced under which retail goods purchased online from outside China would no longer be treated as tariff-free personal postal articles as they were previously. Instead, they would be treated as imported goods, subject to tariffs, import VAT, consumption tax, and other regulatory controls. This change has put pressure on this type of cross border e-commerce model. The “daigou” market reached US$6.5 billion in 2015. It will be crucial to see what happens to this market in the coming years as the new regulations come into effect (and continue to change).  

Aliwangwang
In order to facilitate communication between buyers and sellers, the Alibaba Group launched Aliwangwang, a personal computer-based instant messaging tool on its Taobao platform in 2004. Today, Aliwangwang has over 50 million users, making it the second largest instant messaging tool in China.

Alipay
Also in 2004, the Alibaba Group launched Alipay, a third-party online payment platform with an escrow service (where buyers release money to the seller only after confirming satisfaction with the goods purchased).  Alipay was launched in response to an underdeveloped banking system under which very few consumers held credit cards, and high levels of distrust existed between buyers and sellers. Today, Alipay is the leading third-party payment service with a market share of 50% and approximately 800 million users. [Note: WeChat’s Wallet function is the second largest third-party payment service currently used in China. Both Alipay and WeChat Wallet are developing English capability on their respective platforms to encourage English speakers to use their services].

Tmall
Tmall is a dedicated B2C platform for third-party brands and retailers, launched in 2008. Unlike Taobao, Tmall sellers are either brand owners or authorised distributors (with either an onseller license or a multi-brand license), which can be authenticated by consumers. They need to pay an annual fee to the Alibaba Group or a commission (varying from 0.5% to 5%) on each transaction made. Many foreign companies use the services of Tmall Partners (TPs), essentially outsourcing the management, marketing, data analysis, and optimisation of their Tmall store.

Tmall was in part a response to brand owners’ complaints about products being copied and sold illegitimately on Alibaba’s C2C Taobao platform. Because Tmall sellers either own or are authorised to distribute legitimate brands, Tmall goods are guaranteed to be genuine and therefore command a premium.  Interestingly, despite the associated higher prices, these guaranteed “real” goods are increasingly popular in China.  As a result, Tmall is a force to be reckoned with. Last year during the 11 November 24-hour online shopping promotion called “Singles Day”, Tmall alone amassed over US$9 billion in transaction volume in that one day.  It currently holds almost 60% of China’s B2C e-commerce market share.   

Tmall Global
Tmall Global, launched in early 2014, is Tmall’s cross border e-commerce platform, based in Hong Kong. Tmall Global is of particular interest to New Zealand SMEs who do not already have a presence in the China market. According to its website, Tmall Global is home to over 50,000 merchants with more than 70,000 brands, attracting over 400 million shoppers. Tmall Global is the largest B2C platform that connects foreign merchants with Chinese consumers by giving foreign brands an e-storefront on China’s largest e-commerce platform. In exchange, Chinese consumers have direct access to foreign products that are perceived to be safe, trustworthy and authentic. Foreign products sold on Tmall Global and other cross border platforms are sold in the same packaging used in their country of origin and without the mandatory Chinese language labels required for food products in particular, which are imported through regular channels.

Products sold on Tmall Global are also grouped into ‘national pavilions’, including New Zealand, to help consumers interested in countries of origin to find products easily in one place. Most of the 12 national pavilions are from developed economies known for quality branded products. The pavilions have been established by Tmall, with support from foreign trade promotion agencies, including NZTE, to identify suitable products. Some of the products on Tmall Global are the same as those available on Tmall but with more competitive pricing as a result of preferential Government policies on tariffs and consumption taxes. There are also some products available on Tmall Global that are not available on Tmall due to regulatory constraints, one example being cosmetics. Chinese regulations require cosmetics sold in China to be tested on animals while some international cosmetics make a point of not doing so.

The problem of counterfeit goods
Outside of the guarantee of branded products provided by Tmall and Tmall Global, counterfeit goods continue to be a major problem for Alibaba.  The company was suspended from the International Anti-counterfeiting Coalition in May 2016, after a number of top brands dropped out of the group in protest over concerns around knock-offs being sold on many of its platforms. In June 2016, Ma further compounded the sensitive issue by stating to a group of Alibaba investors that Chinese-manufactured “fake products are of better quality and better price than the real names” because the same factories are using the same raw materials but without the brand names. He noted that “the way of doing business has changed for the brands. It’s not the fake products; it’s not the IP that is destroying them. It’s the new business model that’s revolutionised the whole world.” Ma has since back-tracked on this view and made a statement to the Wall Street Journal saying that Alibaba has “zero tolerance for those who rip off other people’s intellectual property… counterfeit goods are absolutely unacceptable, and brands and their intellectual property must be protected.”

Ma’s comments were seen to be inflammatory, and undermining the intellectual property protection system to which China claims to adhere. His comments are said to be one of the reasons the cross border e-commerce model exists, due to the breakdown in trust for certain categories of products, which are distributed through Chinese distribution channels.

Alibaba’s future plans
Alibaba Group’s reach goes beyond the above sales platforms.  Jack Ma is also now developing additional peripheral services, such as logistics (Cainiao), marketing services (Alimama), and cloud computing services (Aliyun) to bolster the Alibaba ecosystem. He has ambitions to create an “electronic World Trade Platform” (eWTP), which would seek to connect SMEs around the world through logistics and inclusive financing, thereby offering 80% of those “left out of the [current] free trade regime of the world” to participate in trade. Ma notes that the new platform would not look to replace the WTO, but rather, complement the existing free trade regime by growing overall trade activity. He has publicly announced his desire to raise the eWTP topic at the G20 meetings. All of these additional services are of potential interest to New Zealand brand owners looking for an integrated way to reach China’s billion-plus consumers.

New Zealand engagement with Alibaba
During Prime Minister Key’s sixth visit to China in April 2016, he met Chairman Ma in Beijing at a China Entrepreneur Club event and discussed the possibilities of future NZ-Alibaba engagement, as well as Ma’s proposals for an eWTP. During the meeting, the Prime Minister and Chairman Ma witnessed the signing of an MOU between the NZTE CEO and Alibaba’s Australia/NZ countries manager, charting areas of future cooperation. The MOU included (but was not limited to) provisions on express enrolment for New Zealand companies wanting a presence on Tmall Global, establishment of a dedicated Alibaba team to deal with matters related to New Zealand companies (referred by NZTE), and marketing campaigns to promote New Zealand products on its platform.

Since the PM’s meeting with Ma, NZ Inc (led by NZTE) has committed to a work plan of engagement with Alibaba, including China Digital Strategy e-commerce workshops in New Zealand (28-30 June) with John O’Loghlen, Alibaba’s Business Development Director for Australia/New Zealand. O’Loghlen, formerly a well-known member of the Beijing Kiwi entrepreneur community has recently been hired by Alibaba, based in Sydney, and is in close contact with NZTE. Alibaba President Mike Evans visited New Zealand in late July.

JD.com
With more than 25% market share, JD.com is the second largest contender in China’s e-commerce scene. It was listed on the NASDAQ in 2014, and in June, acquired China’s sixth largest e-commerce player YHD.com (previously owned by Walmart), to extend its coverage even wider.

Origins
JD.com (formerly “360buy”) was founded by Richard Liu (Liu Qiangdong) in 1998 as a traditional bricks-and-mortar business selling magneto-optical drives in Beijing. In 2004, Liu launched a B2C online platform, as a response – he said – to slowing sales following China’s SARS outbreak, which discouraged Chinese consumers from venturing into real shops where they might encounter other people. The online platform focused on “3C” products (computer, communication, and consumer electronics) selling its own products directly to the consumer. Today, JD.com sells everything from electronics to food and beauty products, but is still true to its original “3C” roots, in that it was ranked the largest retailer of mobile phones, digital products and computers in 2015, and forecasts itself as the biggest retailer of home appliances in China in 2016.  

Direct sales company

One of the key differences between Tmall and JD.com is that while Tmall is exclusively a platform for third-party merchants to sell their own brands, JD.com’s business model is two-pronged: it can be a third-party platform for companies to open virtual shops, but its main business is to sell its own branded products directly to consumers. With 70% of its revenue coming from this latter direct selling method, JD.com is now China’s largest online direct sales company. Businesses are also able to sell their products directly to JD.com, using the platform as a distributor of their products (also called a B2B2C model). This latter model may be a channel worth considering for smaller New Zealand companies who do not have the budgets to embark on a full Tmall store strategy.

Logistics Network
From 2009 to 2013, JD.com also invested heavily in a logistics network and by 2007 was able to commit to same-day deliveries for “3C” products in major Chinese cities – a service that was unparalleled in the market at the time. The company currently operates fulfilment centres (that receive, package and ship orders on behalf of a company) and warehouses in 43 cities, with over 3500 delivery and pick up stations in almost 2000 districts across China and other countries. This expansive logistics network is a unique selling point currently differentiating JD.com from its main competitor Tmall.

New Zealand engagement with JD.com
In February 2015 JD.com launched its first “country malls” on JD Worldwide (JD.hk). JD Worldwide is JD.com’s cross border version of Tmall Global. JD Worldwide’s first country mall featured France and various French brands, retailers, and authorised distributors. Canada, Germany and South Korea, amongst others currently have country malls, and New Zealand and Australia share on the JD Worldwide platform. JD.com’s CEO has said he expects the international arm of the business to grow by 600% in 2016.   

NZTE leads New Zealand's working relationship with JD.com, focusing in particular on the fresh food part of the business. JD.com’s recent acquisition of YHD.com, an online grocery sales platform, will further extend the reach for New Zealand produce. Our engagement with JD.com is not (yet) as extensive as that with Alibaba, although JD.com’s Chairman Liu has expressed interest in a visit to New Zealand to meet the Prime Minister. In May 2016, JD Worldwide’s CEO said that JD.com was also interested in signing a cooperation agreement with NZTE, modelled on that with Tmall.  

Payment systems
As the country’s middle class grows in size, financial services (including online banking, digital payments, and web-based lending) are becoming new opportunities for Chinese technology companies. According to iResearch, the size of China’s third-party mobile payments market reached US$1.4 trillion in 2015, up almost 60% from 2014. Analysts expect the market to triple in size to US$3 trillion by 2018.

The average user of WeChat Wallet makes an estimated 54 transactions a month, while the average Alipay user makes an estimated 11 transactions a month. This amounts to almost double the number of purchases the average American makes on their debit and credit cards combined.

A key difference between Tmall and JD.com is that the latter does not have its own payment system.  This is a disadvantage compared to Tmall’s Alipay system. This year however, JD.com raised US$1 billion in funding for a new consumer finance subsidiary (JD Finance), possibly indicating plans to launch its own e-payment system in due course.

M-commerce
A common thread flowing through all e-commerce developments in China is the emergence of m-commerce (short for mobile-commerce: the buying and selling of goods and services through wireless handheld devices). The average Chinese internet user spends almost 3.5 hours a day on a mobile device, doing much more than making phone calls or playing games. Over 150 million Chinese consumers use Alibaba’s Taobao app daily, browsing 18.9 products each on average every day. In addition, Chinese m-commerce consumers are engaged, with five million product listings shared and 20 million product reviews written by users, every day.

While Alibaba and JD.com represent only two of China’s e-commerce players, they are the largest, and serve to illustrate the potential scale of this emerging means of accessing China’s billion-plus consumers for New Zealand businesses. E-commerce, and m-commerce in particular, are game changers for anyone wanting to participate in the future of China’s retail industry.

But the regulatory environment in China on e-commerce is in a constant state of flux (para 10 refers) and we should expect it to continue shifting in the foreseeable future. In addition, the considerable costs and challenges of entering (and succeeding) on China’s e-commerce platforms as a SME should not be overlooked. New Zealand businesses will need to be agile, realistic, and do their own due diligence when considering this potentially lucrative route to the China market.

Original report written by New Zealand Ministry of Foreign Affairs (Beijing) August 2016

In addition to the content above, NZCTA member Latipay also provides payment services. Click here to learn more.