The continued momentum of e-commerce growth in China

Author: Gaurav Arora

China is one of the largest e-commerce markets and adopters of digital technologies in the world. In 2013, it overtook the US to emerge as the largest e-commerce market. In FY17, China had over 750 million Internet users and a penetration of nearly 55%. Its online retail market is expected to grow from 17% of total retail sales in 2017 to 25% by 2020. Other Asian markets such as India are on track to follow China’s growth trajectory.

The Chinese marketplace is quite competitive, with local and international brands contesting for consumer attention and market share. Retails and brands constantly need to innovate to stay in tune with the demands of customers.

China’s e-commerce market is characterised by trends such as mobile-first consumer behaviour, digital payments, and social commerce adoption. These trends can be broadly classified across four main themes or growth waves.

The first theme discusses the adoption of omnichannel technology and the consumer journey between online and offline. The second theme delves into the growth of mobile payments driven by the rise in the usage of mobile phones for online shopping. Further, the third theme highlights the expansion of the digital ecosystem and addition of value-added services by China’s top three e-commerce brands to enhance the existing network. Strategic partnerships between search engines, social media platforms and international players that are building adjacent capabilities are discussed in the fourth theme.

Global companies are focused on tapping the potential of e-commerce ready Asian countries where industry has witnessed similar trends.

O2O to omnichannel

Digitalisation has become a platform for not just online growth but also brand building and customer engagement. Online and offline players are coming together and building adjacent technology capabilities such as virtual reality and artificial intelligence to provide the necessary push towards experience-led commerce.

The increase in investment in omnichannel capabilities is driving convergence between e-commerce, mobile and social media, covering a broad spectrum of operational processes including marketing, merchandising, customer service and fulfilment, thereby creating a seamless customer journey between offline and online channels.

E-commerce players and retail beauty players have adopted a new retail model to cross-sell and upsell products. One of China’s largest e-commerce player’s investment and partnership with physical stores, domestic departmental stores and supermarkets demonstrate the convergence of the offline and online retail models by allowing customers to make payments through a mobile app for in-store purchases.

Mobile driving the growth of digital payments in China

Of late, Chinese consumers have moved to shopping through mobile phones and the integrated system of browsing, buying, and payment at a single click. Remote or mobile payments are prevalent due to the popularity of online purchases through smartphones. This shift is largely driven by the fact that over 52%2 of users prefer shopping through mobile devices.

Cash accounts for around 40% of all payment transactions, whereas mobile payments are leading the transition towards online payments, with a market of approximately 12.3 trillion USD as of FY17–18.3 Compared to this, the Indian digital payments market in FY16 is worth 40–50 billion USD, including electronic payments, direct/ACH and mobile payments, and accounts for only 13%4 of the overall payments market.

Mobile payments are being used everywhere from shopping and bill payments to holiday bookings. E-commerce is one of the biggest contributors to online or mobile payments.

The usage of QR codes by one of the leading P2P payment providers has also helped in deeper penetration of mobile payments.

Virtual card technologies are further enhancing the adoption of mobile payments as card issuers are making great efforts to innovate technologies such as Quick Pass, cloud payment and host-based card emulation to work with smartphone applications.

Moreover, the opening of the Chinese clearing market has enabled foreign players to capture a share of the market either by launching an online payment product or partnering with current players. However, Alibaba Group Holdings and Tencent Holdings together hold 92% of the total market share for payment platforms.5

Exponential rise of mobile payments market in China

Growth of the ecosystem and value-added services

In an attempt to become the largest e-commerce company, top players are adding value-added services to their core business and trying to leverage their user base to cross-sell value-added services. E-commerce players are expanding their horizons and adding various adjacent value-added services, including Internet, finance, logistics, cloud computing, and online marketing services, to their ecosystem.

Finance: Consumers and suppliers are leveraging the complete ecosystem of Internet finance services constituting of supply chain finance, consumer finance, wealth management, online payment crowdfunding, insurance, security services and village finance.

Supply chain and consumer finance: Aim to provide flexible funding to suppliers under the B2C direct sales model.

Insurance and security services: Players are competing by further enhancing financial offerings and entering into the online insurance and brokerage business to acquire a banking licence in the immediate future.

Cloud computing: E-commerce players are recognising the importance of cloud computing. They are leveraging their technological capabilities to offer services to third parties. Cloud computing services include computing, data storage, network management, cloud solutions, retail cloud, logistics cloud, e-commerce cloud, sales cloud and operations cloud.

E-commerce companies are diversifying their portfolio, adding support functions that complement their core business.

Strategic partnerships leading to increased mobile traffic

Strategic partnerships are enabling leading players to expand their offerings by leveraging the core competencies of experienced industry players. Partnerships between social media players, international retailers and search engines have been seen in the past year.

Partnerships with retail chains allow e-commerce players to broaden their product offerings on their online market place and expand offline reach.

Partnerships with social media platforms allow them to use their large user base and messaging as a new mode of customer acquisition.

Overall, through these strategic alliances, e-commerce players in China have been able to grow their mobile user base, leading to a year-on-year rise in mobile traffic.

Trends summary

Market trends

  • Rise in e-commerce activity in tier 3 and 4 cities
    As per a report, e-commerce growth in China is driven by Tier 3 and 4 cities. Rural China has seen significant growth as emerging middle income group consumers with limited access to physical retail outlets turn to e-commerce.
  • Transition from the O2O model to omnichannel
    Retailers in China are investing in omnichannel capabilities. Omnichannel capabilities enable retailers to offer a broad spectrum of capabilities from market and merchandising to customer service and fulfilment.
    E-commerce players are shifting to a transaction-driven marketplace model to enhance consumer experience. Virtual reality technology has gradually penetrated the industry, providing a more interactive experience to consumers.
  • Mobile payments
    Mobile payments have become a dominant mode and are experiencing a year-on-year rise.
    With the rise in smartphone ownership, the penetration rate of online shopping on mobile terminals is growing. Consumers are willing to use mobile phones for online shopping.
    • Consumers in China initiate purchases on social networks, with apparel and personal care being the most popular categories.
  • Value-added services
    E-commerce players are expanding their horizons and adding adjacent value-added services such as supply chain and consumer finance, and insurance and security services.
  • Strategic partnerships
    Strategic alliances between e-commerce players and search engines, social platforms and retails chains are growing.
    • Alibaba invested 2.9 billion USD in China’s biggest offline retail group, Sun Art.6

In conclusion: Learnings for India and other emerging markets

Mobile remains the dominant platform for e-commerce in China. Driven by its mobile-first consumer behaviour, innovative social commerce model and strong digital payments infrastructure, China is set to be the global leader in digital payments by 2020.

China’s growth trajectory is echoed in online markets such as India’s, though the Indian e-commerce ecosystem is fragmented into various small and large players. Market and infrastructure readiness remain constraints for E-commerce 2.0, but trends such as content-driven marketing, mobile payments, and omnichannel are relevant in the Indian marketplace as well.

Currently, only 19% of Indian users have access to the Internet compared to around 80% in the US and China. As Internet penetration increases, we foresee tremendous opportunity in India. Global e-commerce players are already trying to capitalise on the opportunities that will be generated by the transition to a new operating model.

We are witnessing a transition from the inventory-led business model to the hybrid business or marketplace-led model where companies are reducing the risk of inventory, warehousing and sourcing, allowing multiple merchants to sell their products. A case in point is a leading player which started as a group discounting site and converted to an online marketplace with products from multiple merchants.

Certain companies have a horizontal business model with varied product offerings, while others have a vertical business model with specialised product offerings. Several players started with a few products and are expanding their product portfolio with multiple offerings. One of the market leaders broadened its initial online offerings from books to various products such as mobile phones, computers, movies and music.

Companies are differentiating themselves through their distribution network. Some of the large players are building their own warehouse and supply chain logistics, while others use a third-party supply network.

Mobile phones are replacing desktops for online shopping and consequently, there has been a rise in mobile payments. In 2013, only 5% of e-commerce transactions in India were made through mobile devices, whereas in 2017, this percentage are risen to 18%.3

Most of the online transactions or mobile transactions are for entertainment, booking tickets and music download. E-travel is another major segment. In addition, the e-retail market comprising online retailing and online marketplace has witnessed an increase in momentum, with a rise in transactions coming from Tier 2 and Tier 3 cities.

The lack of an integrated end-to-end logistics platform is a barrier, causing delivery issues such as reverse logistics management. E-commerce players in India are building value-added services and support functions to boost the growing market, enabling brick-and-motor stores to adopt online channels and cross-sell and upsell their products.

There has been a year-on-year rise in investment and strategic alliances within the Indian ecosystem and this trend will continue in the near future as well. Private equity (PE) firms in India are looking to capitalise on this trend and are increasing their investment in the B2B e-commerce sector, with a focus mainly on companies that provide support functions from delivery and logistics to payments.

Overall, the Indian e-commerce market is maturing with the entry of large international players. The differentiating factor between the e-commerce market in India and that of China is that in China, two to three leading e-commerce players command a majority of the market share, whereas in India, market share is divided among several e-commerce companies with each competing and innovating to gain customer share. A few areas of innovation are instant credit facilities during purchase, customised loyalty solutions, offline point of sale (POS) offerings, etc. A few such innovations, encouraged further by a favourable regulatory regime and better infrastructure facilities, can go a long way in shaping the next phase of India’s story. 

Sources:

PwC. (2017). Total Retail 2017 – eCommerce in china – the future is already here.

Retrieved from https://www.pwccn.com/en/retail-and-consumer/publications/total-retail-2017-china/total-retail-survey-2017-china-cut.pdf (last accessed on 6 July 2018)

PwC. (2017). Total Retail 2017 – eCommerce in china – the future is already here.
Retrieved from https://www.pwccn.com/en/retail-and-consumer/publications/total-retail-2017-china/total-retail-survey-2017-china-cut.pdf (last accessed on 6 July 2018)

The Boston Consulting Group and Google India Private Limited. (2016). Digital Payments 2020 – The making of a $500 billion ecosystem in India.
Retrieved from http://image-src.bcg.com/BCG_COM/BCG-Google%20Digital%20Payments%202020-July%202016_tcm21-39245.pdf (last accessed on 6 July 2018)

The Straits Times. (19 February 2018). China’s mobile payment volume surges in 2017 to S$16.7 trillion by October. Retrieved from https://www.straitstimes.com/asia/east-asia/chinas-mobile-payment-volume-is-worlds-largest-at-s167-trillion (last accessed on 6 July 2018)

The Boston Consulting Group and Google India Private Limited. (2016). Digital Payments 2020 – The making of a $500 billion ecosystem in India.
Retrieved from http://image-src.bcg.com/BCG_COM/BCG-Google%20Digital%20Payments%202020-July%202016_tcm21-39245.pdf (last accessed on 6 July 2018)

Knowledge@Wharton. (17 January 2018). The mobile payment race: Why China is leading the pack – for now.
Retrieved from http://knowledge.wharton.upenn.edu/article/how-will-chinas-overseas-mobile-payment-systems-fare/ (last accessed on 6 July 2018)

6 Reuters Staff. (20 November 2017). Alibaba goes offline with $2.9 billion stake in China’s top grocer. Retrieved from https://www.reuters.com/article/us-alibaba-sun-art-retail/alibaba-goes-offline-with-2-9-billion-stake-in-chinas-top-grocer-idUSKBN1DK057 (last accessed on 6 July 2018)

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