E-Commerce: Changing the Way Business is Done with China

E-commerce has become an increasingly important part of doing business with China, both in terms of sourcing goods from Chinese manufacturers as well as selling to Chinese consumers. The incredible growth in online commerce in China got a lot of attention with the record-breaking $25 billion IPO of China e-commerce giant Alibaba on the NYSE in September 2014. Started by founder Jack Ma in his apartment in Hangzhou with $60,000 in 1999, Alibaba reported that in 2013 goods worth $248 billion were sold on its marketplaces, more than Amazon and eBay combined.[1] Although e-commerce in China is vast enough to allow for competitors to Alibaba such as JD.com and niche upmarket fashion site ShangPin.com, Alibaba is currently the clear leader in market share for China e-commerce.

To illustrate the breadth of e-commerce in China, note that the businesses operated by the Alibaba Group includes in part:

Alibaba.com– the company’s original marketplace and a business-to-business (“B2B”) platform for wholesale trade, where businesses are able to sell their products to companies on a global scale. Much of the business done on Alibaba.com consists of small businesses in other countries sourcing various goods from Chinese manufacturers.

Tmall– a business-to-consumer (“B2C”) marketplace somewhat similar to Amazon, providing a “mall experience” where brands can set up their own virtual store in the mall. Sellers pay a deposit for listing on Tmall, which earns a commission on each transaction. Several well-known Chinese, and foreign brands (e.g. Apple, Reebok, Burberry, Casio), use Tmall. For foreign brands, other advantages include the fact that Tmall guarantees that all items sold on it are genuine (sellers are required to pay a large deposit that is forfeited if they are caught selling counterfeit goods), and they don’t need to obtain the ICP license that would otherwise be necessary for on-line sales in China. In 2013 Tmall accounted for approximately half of China’s $300 billion B2C market.[2]

Taobao– a consumer-to-consumer (“C2C”) marketplace like eBay, reportedly with over 500 million registered consumer accounts and 80 percent of the C2C market in China.[3] Either at a fixed price or by auction, sellers post new and used goods for sale or resale on Taobao, and like eBay, it is also used by many merchants to sell directly to consumers.

Alipay– Alipay is a payment system for purchases made from desktop computers, tablets, and smartphones and has more than 550 million users in China, processing about 8.5 million transactions per day.[4] In October 2014 Alipay introduced the “ePass” service to make it easier for Chinese online consumers to buy products on the websites of US retailers. The system allows for ePay to be integrated into a US retailers’ website, and then manage payment and door-to-door shipping. Alipay will also help market US products to Chinese consumers.

As with other areas of its economy, e-commerce in China started from very meager beginnings a relatively short time ago. As recently as 2000 China had only 2.1 million internet users and no e-commerce applications.[5] By 2013 however, the number of internet users was approaching 600 million and China’s sizable and expanding middle-class were making purchases via e-commerce regularly.[6] Growth in China’s consumption through e-commerce is expected to continue due to increasing wealth, a greater disposition on the part of Chinese consumers to spend, more internet access in rural areas, and improvements to infrastructure. By 2020 the e-commerce market in China is projected to be larger than that of the US, Germany, Britain, France, and Japan combined.[7] Regardless of the type of transaction, e-commerce has and almost certainly will continue to change the way that business is done with China.

[1] Brad Stone, Alibaba’s IPO May Herald the End of U.S. E-Commerce Dominance, Businessweek (August 7, 2014) available at http://www.businessweek.com/printer/articles/218153-alibabas-ipo-may-herald-the-end-of-u-dot-s-dot-e-commerce-dominance.
[2] Ernie Diaz, Why Tmall is the Smartest Route Into China’s Ecommerce Market, Venture Beat (July 20, 2014) available at http://venturebeat.com/2014/07/20/why-tmall-is-the-smartest-route-into-chinas-ecommerce-market/.
[3] China 360, E-Commerce in China: Driving a New Consumer Culture, KPMG (January 2014) available at http://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/Newsletters/China-360/Documents/China-360-Issue15-201401-E-commerce-in-China.pdf.
[4] Alex Barinka & Craig Giammona, Alipay Offers US Retailers Tools for Selling to China, Bloomberg (October 15, 2014) available at http://www.bloomberg.com/news/2014-10-15/alipay-offers-u-s-retailers-tools-for-selling-to-china.html.
[5] Id. at 3.
[6] Id.
[7] Id.