China And E-Commerce, How Does This Work?
When you visit China’s bustling cities of Beijing, Shanghai, Guangzhou and Shenzhen, you will find that e-commerce has become a vital part of the people’s lives. Cheap smartphones, low cost distribution and logistics and an increasing demand for quality goods and services have made e-commerce one of the most important and dynamic sectors of the Chinese economy in just a few years. To realize what role cross border ecommerce can play for China and for anyone selling to this market, it is vital to understand the country’s economy first.
1. China’s Economy: A Miracle Without Precedent
China is not only the second largest economy in the world (and the largest measured by purchasing power parity), it is also the most important market for many goods and services including luxury products, PCs, cars, wine, mobile phones, tourism, industrial robots, luxury watches or male skin care. The list is endless. And growth will continue if one can believe research firms: By 2017, China will become the largest market for FMCG and other goods including digital cameras, beer, apparel and iPhones, just to name a few.
The Middle Kingdom is already the largest consumer market and will soon be the largest grocery market (with USD 1.5 trillion in sales) and the largest retail market (with USD 4.2 trillion in sales) within 2-3 years from now (PwC). It is a fascinating story how a country could move from food ration coupons to become the world’s most important consumer market in 25 years. Imagine you can sell to the largest market in the world! Whatever you produce and whatever service you provide, chances are pretty high that you find customers among the 1.35 billion people living in China.
But how is it possible that Chinese consumers suddenly have so much money and spend a good part of their income to buy typical household items such as TVs, PCs, white goods, laptops, tablets, smartphones, travel packages and even cars and high-end apartments? The answer is the China Economic Miracle, which started after 1978 when President Deng Xiaoping opened up the country to foreign investment, private ownership and the capitalistic system. Another milestone was China’s admission to the World Trade Organization in December 2001.
Since then, China has become the largest exporter of goods, the second largest importer of goods, and the top destination for foreign direct investment with close to USD 100 billion of foreign money pouring into the country every year since 2000. The economy grew by over 9% on average for 30 years. Its biggest expansion in the last 15 years was recorded in 2007 with over 14%. China’s economic contribution to the world has grown to 28%. In Asia, it accounts even for 50% of the region’s economy. Salaries of Chinese workers have gone up and more people are able to save and spend money. Per capita income increased considerably over the years, from USD 300 in 1990 to USD 7,400 in 2014.
China’s largest cities and wealthy regions do even better. In first tier cities (Beijing, Shanghai, Guangzhou, Shenzhen), second tier cities (some 20 cities throughout the country’s) and in provinces in the north, east and south, per capita income is considerably higher. Beijing, Tianjin, Jiangsu, Zhejiang, Inner Mongolia, Liaoning and Guangdong have surpassed the USD 10,000 mark in 2014. Shanghai already boasts a GDP per capita of USD 16,000.
Today, China has 190 billionaires. One of the newest members of this club is Jack Ma, founder of New York-listed Alibaba Group, which owns the largest e-commerce platforms in the world. China also has 2.4 million dollar millionaires (twice as many as Japan or any European country). Only the United States has more millionaires: over 7.1 million of them (Boston Consulting Group). However, the number for China might be much higher because the BCG study only included households with USD 1 million on liquid wealth. Many Chinese got rich through real estate and own often several apartments worth millions of USD.
But more importantly, China has developed the largest middle and upper middle class of the world. 350 million people or about 25% of the population belong to this group. These are the folks buying goods and services as their income and discretionary spending increase year after year. By 2020, 630 million people in China are expected to belong to the middle class with more than half earning USD 20,000 or more a year (McKinsey).
2. China’s Online Shoppers: 350 Million Strong And Growing
Chinese consumers have missed most developments in the retail sector. Until the 1990s, most people could not buy goods in shops or order products. China’s iot solutions opened up in the last 15 years and has done so in an unprecedented way. Chinese shoppers jumped from controlled distribution organized by the government straight to shopping malls. Today, shopping malls and other brick and mortar businesses face a difficult time in many of Chinese cities because people buy their clothes, food, wine and even cars online.
E-commerce is the latest development in a country that was one of the poorest in the world some 35 years ago. Chinese are Internet aficionados. It took the country only 10 years to grow its internet penetration from 7% to 48%. In the first quarter of 2015, statistics show that 650 million Chinese have access to the Internet (in 2004, there were only 95 million) and 560 million people access the Internet through a smartphone. Chinese netizens are not much different from people elsewhere. They play games, use social media (the Chinese versions of Facebook, Twitter, Instagram and so on), exchange information, communicate, make online payments and spend money. Even more impressive is the growth of online shopping in China.
Today, there are over 350 million Chinese online shoppers, spending close to USD 300 billion in 2014. U.S.-based Forrester Research estimates that in 2019, online shoppers will spend USD 1 trillion, of which some 40% will be made through mobile devices. In 2014, mobile shopping made up for 21% of overall online spending. Hence, keep in mind, mobile is big now and will become even more important in the years to come. China has now more online shoppers than the U.S. has people. China’s e-commerce community is by far the biggest in the world, dwarfing the American market of 200 million (which spent about the same amount as the 350 million Chinese). Even more impressive is the comparison with India, which has almost the same number of inhabitants as China (1.25 billion vs. 1.35 billion). There, some 10 million people shopped online in 2014, spending USD 3 billion.
Research also shows that Chinese buy more often online than people in other countries. According to a study published by Focus Money magazine, Chinese consumers shop online 8.4 times each month, compared to 5.2 times in the United States, 4.3 times in the UK, 2.9 times in Germany and 2.4 times in Switzerland. Reasons are plenty in a country that fights pollution, traffic jams and infrastructure shortcomings: Online shopping is convenient and fast, the choice is huge, and the delivery is free and usually arrives on the same day or the next day. In a country that has over 160 cities with over 1 million inhabitants, these are compelling arguments.
Why should one bother going to a supermarket and waste time in traffic when a smartphone can do the job? Hence, it is no surprise that online shopping is huge in China. During China’s Single’s Day on November 11, which is similar to Cyber Monday, Black Friday or Super Saturday in the U.S., Alibaba’s e-commerce platforms recorded total transactions of over USD 9.3 billion.