China Internet: The long march to e-commerce


By Alice Woudhuysen

China is known the world over as a leading producer of electronic equipment and high tech goods. But when it comes to the buying and selling products over the internet, the country is still in its infancy.


In a country famous for its government-led plans, this month saw an entirely new one when the Chinese government rolled out its first e-commerce development plan. Dubbed the “E-Commerce Development Plan during the 11th Five-Year Period,” the plan aims for China to have a basic support systems and technical services to support the development of e-commerce nationwide within three years.


By 2010, according to China‘s bureaucrats, e-commerce will become an “important industry” and e-commerce applications should promote the “dramatic growth of economic and social development in China.” Given the state of the country’s internet network to date, this could be a very tall order indeed.


On the plus side, internet usage has grown rapidly in China over the past ten years. The EIU predicts that by the end of 2007, China will have more than 140m internet users and that within the next few years it will overtake the US as the country with the most internet users in the world. However, in terms of e-commerce, China remains at the starting blocks.

从积极的一面看,过去的十年,中国互联网使用快速增长。Economist Intelligence Unit预测,到2007年底中国将会有超过1.4亿,在未来的几年内将会取代美国成为世界上互联网用户最多的国家。然而,就电子商务来说,中国仍处于起步阶段。

According to China-based IT consultancy Analysys International, China’s retail e-commerce sales reached US$657m in 2006 and may triple to US$1.25bn in 2010. By comparison, the US Department of Commerce estimates that US retail e-commerce sales reached US$122bn in 2006 and are growing at over 20% annually.


China’s e-commerce is lagging behind most developed markets because it is hindered by a lack of policies, a proper credit system and poor logistics. The new e-commerce development plan should help to tackle these problems. And, while China should not expect to catch up with the US in terms of market share, it can expect to benefit from US internet companies investing in China.


A nascent B2B market


According to a report by Chinese market research and advisory firm China Center for Information Industry Development Consulting (CCID Consulting), the trade volume of China’s e-commerce – which includes business to business (B2B), business to consumer (B2C) and consumer to consumer (C2C) – grew by 52% in 2006. However, whilst 99% of China’s 42 million companies are small and medium-sized, only 3% of them made deals over the internet in 2006.


Conversely, in the US, B2B e-commerce is progressing rapidly, with the US Census Bureau estimating that over 94% of all e-commerce can be classified as B2B. According to an end-2003 review from the Institute for Supply Management and US market research firm Forrester, 85% of large US companies use the internet to purchase materials and services.


As the EIU’s 2007 e-readiness rankings suggest, China is actually a beneficiary of the growth of B2B volumes in the US. The result has been the creation of big, sophisticated B2B transaction service providers, including one of the world’s largest online B2B marketplaces, Alibaba.

EIU2007年电子化整备度的排名显示,中国确实在美国B2B 业务增长中受益。促使中国出现了大型而成熟的B2B交易服务提供商,包括世界上最大的在线B2B市场之一的阿里巴巴。

US portal Yahoo! bought a 40% stake in Alibaba for US$1bn in 2005. Today, over 15m business and consumer customers in China use Alibaba’s online platform. While most do not pay to use basic services, more than 100,000 businesses do. The Chinese firm is evolving into a comprehensive supplier of online business development resources for Chinese customers: many of whom would not be doing business online at all if not for Alibaba.


An inefficient credit system


E-commerce platform vendor Art Technology Group (ATG) suggests that only 24% of China’s internet users currently shop online. Although the Chinese government is eager to increase B2C e-commerce, it largely depends on credit card purchases, and it is very difficult for the average Chinese citizen to get hold of a credit card.


Countrywide, it generally takes more than a month to obtain a credit card in China as the banking system remains highly inefficient. Individuals spend a long time dealing with an inefficient system of credit checks and sub-par service, where consumers regularly have to wait in two-hour long queues to see a bank teller.


In 2004 there were just 10m cards in circulation in China. Although 2006 saw the addition of 15.6m credit cards, there are still fewer than 50m credit cards in circulation for an emerging middle class of 250m. And even those fortunate enough to have a credit card find that their cards lack viable credit limits because of Chinese banks ’ weak risk-management departments.


However, this situation is beginning to change. Banks such as China Merchants Bank (CMB) are pushing hard to develop credit cards for use in online transactions. CMB, which is the market leader, is also coming up with co-branded credit cards to appeal to younger Chinese customers. To date, it has forged relationships with Young Card, Bertelsmann, Hello Kitty, MSN mini, Ctrip (CTRP) and Air China (AIRYY) to name a few. Given that an estimated 90% of all online shoppers in China are under 40, this should be lucrative for both banks and online retail sites.

这样的境况开始转变。银行例如招商银行,开始着力于开发信用卡的网上交易使用。招商银行首先开发出一种联名卡用于吸引年轻的中国消费者。迄今,招商银行已经推出young卡,贝塔斯曼书友信用卡,Hello Kitty粉丝信用卡,MSN珍藏版迷你信用卡,携程旅行信用卡,国航知音信用卡等等,这里只能简单列举几个。假设估计有90%的中国网上购物者是40岁以下,那推出这些联名信用卡对银行和网络商家都是有利可图的。

China’s financial services market is also opening its doors to global banks such as Citibank, Standard Chartered and HSBC, which are all buying stakes in Chinese banks. In October 2006, GE Money (the consumer and small business financial services unit of General Electric) invested US$100m in Shenzhen Development Bank (SDB) and launched a credit card with the bank and Wal-Mart.


Online trust


Even with a better credit system, the success or failure of e-commerce strategies is linked to the issue of online trust. According to a survey produced by US-based research and advisory company in August 2006, even in the US, nearly half of online adults said that concerns about theft of information, data breaches or internet-based attacks affected their purchasing payment, online transaction or e-mail behaviour. The financial cost of this mistrust in e-commerce was approximately US$2bn in 2006. Gartner also estimates that US$913m in 2006 e-commerce sales were lost because of security concerns among online shoppers.


China’s problem is that it lacks an online payment system for handling credit card transactions in a safe and efficient manner, meaning that only about one in three online purchases is made using a credit card. The remainder are paid with cash on delivery or post office transfers. What is clear is that the government needs to develop a better online payment system and encourage e-commerce sites to support multiple payment models which allow greater flexibility when purchasing goods.


Another issue linked to online trust are the products themselves. Home-grown internet retailers offer a limited product selection, of which the quality is often suspect. In March this year for example, online book store was forced to apologise to a publishing house for selling pirated books online. Incidences like these lower consumer confidence, thus hindering e-commerce growth.


Poor logistics


Also hampering China’s e-commerce growth are its poor logistic and distribution networks, which restrict how far apart sellers and buyers can be, thus making sending purchased items difficult.


US internet retailers such as Amazon are helping to remedy the situation. In June this year, Amazon invested more capital into its Chinese e-commerce operation It introduced some of the features of its worldwide sites to the Chinese market to boost its performance, offering free shipping on all orders and providing customer-specific purchase recommendations. It has also increased its stake in, which subsequently changed its name to Joyo/Amazon.


Amazon first invested in in 2004, when it was generally considered to be China’s leading B2C provider. According to Analysys International, the Chinese website appears to have grown faster than Joyo/Amazon in terms of registered users. now has 18% share of the B2C market, whilst Joyo/Amazon has 12% and has just 6%.


Although these are the top three service providers, they control only 36% of the B2C market. The rest of the market is occupied by a huge number of small-scale B2C vendors, which look unlikely to benefit from foreign investment.


Foreign investors


Foreign internet retailers are eager to establish their operations in China. Websites such as Google, Yahoo, eBay and MySpace are all trying to break into the fast-growing China market. eBay acquired Chinese shopping site Eachnet in 2003 and Japan’s Rakuten has invested in Ctrip. However, local players like Baidu, NetEase, Alibaba and Alibaba’s Taobao auction site are still dominating their Western rivals.

外国互联网经营者企望在中国运营自己的业务。如Google, Yahoo, eBay, MySpace都设法打开快速增长的中国市场。在2003eBay收购了中国购物网站意趣。日本的乐天(Rakuten)投资于携程旅行网。也有本地网络运营商,像百度,网易,阿里巴巴以及阿里巴巴旗下的淘宝拍卖网相比西方来的对手,仍然占据本土市场的优势。

This is encouraging for China, which may not want to rely too heavily on the US for e-commerce success. However, by remaining open to the US, and by the US remaining open to China, both countries look set to benefit. US companies will gain entry to China’s growing e-commerce market, whilst transferring new technology, operational expertise and business knowledge to China.


China can still do a lot on its own. Once it has rolled out its e-commerce development plan and improved its credit system and logistics, this should increase online trust. This, in turn, should successfully increase online spending.


It might be worth questioning how big a role the government can take in all this considering that the e-commerce market in China is dominated by private sector companies. However, the plan does highlight the government’s awareness of the huge potential of e-commerce and its determination to enhance, not block, its development.


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