This article provides an overview of the potential of the China eCommerce market and outlines some of the key elements that prospective cross-border retailers need to be aware of before entering it.
China is the world’s second largest and fastest growing economy and continues to demonstrate exceptional year on year eCommerce growth, firmly placing China as the largest eCommerce market in the world providing huge opportunities for any online retailer.
China is going through major technological developments including growing internet penetration rates, social media advances and fast developing marketplaces which are all contributing to this growth.
With a growing middle class and the rapid increase in mobile internet penetration, China is a lucrative market. With 695m mobile internet users and 88.9% smart phone penetration, mobile has been described as a significant contributor to growth.
Coupled with this is an interest in quality British products and an appetite for goods that cannot be sourced locally. Recent research into the needs of online shoppers in China reported that 87% like to buy British goods and 86% buy from UK sites if items aren’t available locally. The main factors driving purchases from UK sites are; trust in UK brands, a belief that the items will be genuine and a view that goods will be better quality.
Specifically, online sales in 2016 are expected to reach USD 625 billion. According to the latest official information, a March 2014 European Commission factsheet, EU exports to China increased by 2.9% in 2013, to reach a record €148.1 billion; nearly doubling in the past five years. Clearly with the recent economic slowdown in China, these figures may change but if they are not doing so already, UK online retailers should consider exporting to China to take full advantage of this growth.
In China UK brands are enduringly popular. Online retailers have a unique advantage to provide online shoppers in China access to goods they believe to be high quality and genuine.
Levels of online retail growth in China have been increasing dramatically since 2006, as shown by the graph below, which charts the growth of the Chinese online retail market from 2009 – 2015.
Figure 1: Online retail growth in China
This shows the dramatic growth of the Chinese online retail market, with many analysts predicting that it will exceed $1 trillion by 2020/21. 2016 sales increased by 26% on 2015 figures, according to the Chinese Ministry of Commerce, coming in at ¥5.16 trn. It’s good news for international e-retailers - online retail spending in China will continue to deliver double-digit growth, outstripping the growth of the broader market.
Mobile commerce has also grown dramatically in China over recent years. In 2014, mobile retail registered 211.5% year-on-year growth as compared to 35.7% of PC-shopping. According to research carried out by the Boston Consulting Group, over half of Chinese online shopping is now carried out via a mobile device while Alibaba reported in March 2017 that 80% of its retail revenue came through mobile devices.
Figure 2: China's leading online retailers
Whilst attention focuses on the main players, the National Equities Exchange and Quotations (NEEQ) has compiled a report charting the growth of smaller retailers, many of whom focus on specific categories. The performance of these categories might suggest market opportunity for international merchants and certainly highlights a customer appetite.
China’s home-grown marketplaces occupy an impressive proportion of the Chinese eCommerce scene and are an important consideration for any prospective cross-border online merchant. Alibaba dominates B2C and C2C eCommerce within the territory but is facing strong competition from JD.com and other emerging outlets.
Alibaba runs two main eCommerce platforms:
The unique ‘mall experience’ offered enables retailers to set up their own websites within Tmall, so that they occupy virtual ‘mall space’ on the site. To display on this platform, sellers must pay a deposit, and Tmall recoups a commission on each transaction made.
Importantly for international sellers, a Tmall virtual shop avoids the requirement of obtaining an ICP license (see Legal Framework and Regulation).
Figure 3: Online marketplaces in China
Alibaba’s online stores together now account for roughly 80% of China’s entire eCommerce market. Despite the popularity of Alibaba’s platforms, however, there is still room for competitors to gain a strong foothold.
It is important to note that many, including ‘official’ statistics on the Chinese market often include B2B, B2C and C2C; some also include Online-2-Offline (O2O).
Whilst an obvious mechanism for gaining entry to the Chinese market, merchants should be aware of the associated costs with accessing these marketplaces. For example, initial deposits can range from $8,000 to $25,000; annual service fees of $5,000-$10,000 and then commissions on sales revenue around 5%.
Other ‘incidental’ costs can include being required to use approved agencies in the production of store fronts, collateral and sales information; guaranteed stock availability and stock location. Agency fees alone can run into many thousands of dollars.
These costs are purely indicative with expected volumes, brand awareness and strategic branding all having an impact. However, they should be explored thoroughly as some brands have found a return-on-investment period exceeding 5 years.
Merchants can however balance these costs against access to over 280 million active buyers. This leads to another conundrum - can your existing business cope if the Chinese market really takes off for you? Because it can do so very quickly.
Another option to consider, perhaps as a first step, is the emergence of business models that allow Chinese consumers to purchase from international brands, without the brand having to have a Chinese presence. One example is Xiaoshongshu (Little Red Book). Recently valued at more than $1bn, this app allows customers to select products from around key markets and pay the company for them. Xiaoshongshu then sources these products for the customer.
This article provides an overview of the China eCommerce market – we have produced a full country guide covering in-depth information on multiple aspects of trading into this territory including logistics, payments, legal framework and marketing.
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