China’s E-commerce Explosion

CKGSB Professors and Industry Experts Discuss How Best to Thrive in a Fast-Changing Market

As the world’s second-largest e-commerce market after the US, China’s online and mobile shopping sector is exploding. In fact, online shopping increased by a massive 49% in 2014 year-on-year. But what are the key factors driving this growth and will e-commerce eventually replace brick-and-mortar stores? How is e-commerce changing the behavior of Chinese consumers and what’s in store for the sector going forward?

These were just some of the questions discussed at an exciting event in Beijing on Wednesday, co-hosted by Cheung Kong Graduate School of Business (CKGSB) and the European Union Chamber of Commerce in China, with additional support from consulting firm EIBENS.

150 executives, MBA students and journalists gathered at CKGSB’s Beijing campus to hear a world-class array of speakers share their insights on the future of China’s e-commerce industry.

Sun Baohong, Dean’s Distinguished Chair Professor of Marketing at CKGSB, gives a keynote speech at CKGSB’s Beijing campus on June 24, 2015.

Sun Baohong, Dean’s Distinguished Chair Professor of Marketing and Associate Dean of Global Programs at CKGSB, kicked off the event with an overview about both the evolution and current state of e-commerce, pointing out that while frictions and inefficiencies still exist in the marketplace today, the end goal of all the various ventures is zero-effort commerce – an industry that is as efficient as possible.

Professor Sun highlighted many different channels, including social and mobile commerce models, but she said that the application of big data is leading us down the road towards customer-led commerce. For example, e-commerce customers state which logistical features are more or less important to them for any given transaction (delivery date, home delivery vs pick-up at depot etc), and algorithms can then collate these customer preferences and demands on a wide scale to make the delivery process more efficient and thus offer better prices.  

Professor Sun ended by pointing out how innovative Chinese companies have become in e-commerce. Many MNCs are engaged in the Chinese market, but none of them dominate in the e-commerce, social commerce or mobile commerce spaces. Chinese smartphone maker Xiaomi, she said, provides a good recent example of this. The company did not market its products in a traditional way, but came up with a different model by crowdsourcing its marketing to great effect. As a result, customers felt truly engaged with the brand and propelled Xiaomi to great heights very quickly.

Will Tao, Analysis Director at market research firm iResearch, then provided an array of up-to-date statistical data on China’s e-commerce market before highlighting some industry trends. China only went online in 1994, but now has a staggering 650 million internet users. Even so, given the enormous size of the population, China’s internet penetration rate stands at 47.9%. But Tao said he expected the online shopping market, currently at 10.3% of all shopping in China, would keep growing in line with continued internet penetration.

Will Tao, Analysis Director at iResearch, speaks at CKGSB’s Beijing campus on June 24, 2015

Tao noted the dominance of Ali (Taobao+Tmall) in the Chinese market, adding that it would be very hard for rivals to challenge that dominance. Taobao is so strong, he said, partly because so many things are manufactured in China, but also because China’s mid-level cities (Tier 3 and below) have a strong unsatisfied customer demand for certain goods that retail stores have been unable to fill, forcing customers to go online as a result.

Other trends included the quick shift from PC to mobile, the rapidly growing market in rural China, the bright future for cross-border e-commerce and Internet financing relieving pressure on capital.

A lively panel discussion, moderated by CKGSB Assistant Professor of Marketing Li Yang, followed with experts from some of the leading companies in the Chinese retail and e-commerce space.

Li Yang, Assistant Professor of Marketing at CKGSB, moderates a panel discussion at CKGSB’s Beijing campus on June 24, 2015.

Larry Kung, Executive Chairman of Leyou, an omni-channel retailer of maternity, baby and young children’s products raised some eyebrows with his passionate defense of retail, despite the predominant belief that e-commerce is the future. In fact, Leyou was started as a pure e-commerce player, but then started to introduce a growing offline element through retail stores.

“Retail stores are not fun to shop at, so people have turned online,’ said Kung. “But China needs better retailers, not more e-commerce. Two-thirds of our e-commerce business comes from people who come into one of our stores and can’t find what they want in stock, so they place an order online to ship the item to their home.”

But Tony Feng, Vice President of Branding and Public Relations at VIPShop disagreed with Kung’s assertion that the growth of the e-commerce industry was largely due to the government’s influence. While he conceded that the government plays an active role in promoting the industry, he argued that the demand is clear for all to see. “The government is not requiring people to buy online, or giving tax rebates to people for doing so,” he said. “But I do agree with Larry that we need more retail experience in China, instead of more real estate players.”

Panel (from L to R): Li Yang, Assistant Professor of Marketing, CKGSB; Will Tao, Analysis Director, iResearch; Larry Kung, Executive Chairman, Leyou; Tony Feng, Vice President of Branding and Public Relations, VIPShop; Xu Bing, Vice President of Softlines Business, Amazon China; Mirko Wormuth, CEO, TWICE Fashion

Xu Bing, Vice President of Softlines Business for Amazon China, then spoke about another increasingly hot topic within the e-commerce sector. “For Amazon, cross-border e-commerce is where we have a natural advantage because we’re already in so many markets globally, even if we are not currently one of the major players in China. So we are trying to leverage that advantage as much as possible.”

Mirko Wormuth, CEO of accessories business TWICE Fashion, said his company started out as an offline, bricks-and-mortar brand, but soon felt the pressure to get online. “Offline is still a very good business, though, and is here to stay,” he said. “You have to stay active within all the different channels, both online and offline. Traditional retailers are looking to go online, but I am still wondering when I will see the first Amazon or VIPShop store in the mall!”

Both Kung and Wormuth also highlighted the difficulties for smaller players to deal with Tmall and Taobao, with Kung saying that the fact that China is prone to fake products in the market would eventually drive consumers back to offline shopping.

The session ended with some questions from the audience that included discussion of the Shanghai free trade zone and customer service issues in China.

CKGSB Professor of Marketing Sun Baohong addresses a packed room at CKGSB’s Beijing campus on June 24, 2015.

Finally, the panelists were asked to list the single biggest problems they faced with their businesses—and gave some revealing answers.

Wormuth said: “In the offline world, our biggest problem is recruitment; in the online world, it’s developing digital muscle. We’re hoping that Wechat’s commerce platform might be the way forward, because we just can’t compete with Tmall and Taobao.” Xu Bing added, “Amazon’s biggest problem is how to bridge the very strong system we have globally and make that work in the very fast-changing China environment.”

Leyou’s Kung broke his answer down into three parts. “On a macro level, it’s the government being influenced by the monopolistic internet companies; at the next level, it’s how tax is collected individually by many, many different municipalities, rather than on a federal level as in other countries, which makes expansion in China unnecessarily difficult; and on a micro level, it’s the struggle to bring in the best staff to enhance the customer experience.”