The Future of China’s E-commerce

Analysts believe that in sev- eral years， Chinese online shoppers will experience an evolution from being “price sensitive” to “experience sensitive”. B2C online retailers that specialize in specific product categories with good service and branding will challenge the dominance of Taobao C2C websites.

As a result of fierce competition， a large number of B2C and C2C retailers were knocked out in the industry shakeup. The online to offline model is likely to be the right direction for companies to profit from the explosion of e-commerce.

E-commerce will have a bright future in China， not only for its strong growth momentum， but also for full government support and exemption of monopoly by State-owned enterprises suffered by traditional industries.

Phasing out the discount model

Alibaba Group’s Taobao websites are virtually synonymous with online shopping in China， but that may not always be the case， according to a Wallstreet Journal report.

In China e-commerce is all about discount shopping， said Hurst Lin， general partner at venture capital firm DCM and former COO of Chinese web portal and microblog operator Sina， but that won’t last. Mr. Lin believes that in several years， Chinese consumers will have more discerning taste and that online retailers with the best design and branding will challenge the dominance of Alibaba Group’s Taobao websites.

A Bain Company survey found that while price remains the primary motivator for shopping online， convenience and variety now are major considerations for a surprising segment of shoppers. Online consumers have started to diverge， with a significant number evolving from“price sensitive” to “experience sensitive.”

“Today， what you’re looking at is discount，” Mr. Lin said. “That’s what Taobao is all about — the cheapest stuff， comparison shopping.”What Taobao websites offer is similar to what eBay offered to online shoppers in the 90s， he said.

Growing competition has recently begun to erode Taobao’s market share. Its share of online purchases in China slipped to 71% by value in the second quarter from 75% a year earlier， according to Analysys International.

But analysts said that“eBay is declining” in the U.S. and though Taobao is still on

an upswing， its dominance will eventually decline as well. Venture capitalists are now looking for trends that will pick up two or three years down the line. Taobao “will have their heyday for another four to five years， then eventually consumers” will go to online retailers that specialize in specific product categories， Mr. Lin said， adding: “Taobao better go public.”

Alibaba chairman Jack Ma said the company doesn’t have plans for an initial public offering of Taobao， but that he wouldn’t rule out an IPO for Alibaba Group. The value of transactions on Taobao had doubled last year to hit 400 billion yuan ($63 billion). Taobao sites didn’t disclose transaction numbers this year， but Mr. Ma said he expects the number to reach a trillion yuan in 2012.

Experts believe e-commerce companies， rather than simply competing on price， will eventually have to differentiate themselves by offering better design， more entertainment value and services that increase margins. For example， Lin cited flash sales websites that add a sense of urgency by setting time limits for people to keep purchases in their virtual shopping carts or a website that offers buyers the ability to do swaps with other buyers if they have a last-minute change of heart after placing an order.

360buy.com， also known as Jingdong Mall， another Taobao challenger， has done well to attract consumers with low prices and fast delivery service. But it’s still unclear how the company will make money given its low profit margins. Analysts believe 360buy needs to go one step further， as online sale should not be all about discounting. As consumers become less price sensitive， retailers will need to deliver superior customer service and find ways to cultivate customer loyalty.

An Alibaba Group spokesman said the company is addressing the changing tastes of Chinese consumers with Taobao Mall， which “is focusing on service quality” and with its shopping search engine eTao which “provides info other than pricing，” including“product guarantees， user reviews， shipping options， etc.”

Expansion of B2C

Consumer-to-consumer (C2C) online marketplaces such as Taobao. com lead with a 77% market share compared with just 23% of businessto-consumer (B2C) sites. But explosive B2C growth is underway， fueling the expansion of China’s entire e-commerce industry. By 2015， China will be the world’s leading e-commerce market， and B2C e-commerce will represent more than 40% of total online sales， according to iResearch Inc.

“Business-to-customer e-commerce will become the main driver of China’s online shopping industry，” said Ding Jiaqi， an analyst with the domestic information technology research company iResearch Inc.

Many big traditional retail names are gearing up to seize the opportunity， including Wal-Mart， which is opening up its China e-commerce headquarters in Shanghai. Meanwhile， Taobao is using its 370 million user base to feed traffic to Tmall， its entry in the B2C market. In 2010 alone， it quadrupled sales， serving as a major profit generator for Taobao.

From clicks to bricks， online to offline

As the number of Chinese Internet users surges， investment opportunities in the online to offline sector are being pursued by angel and venture capital investors， as reported by China Daily.

O2O， also called offline e-commerce， means netizens and mobile Internet users are able to see discounts and service booking information from stores on websites that encourage them to visit real rather than virtual outlets.

The Bain Company survey found that China’s e-commerce ecosystem — including sourcing， payment and delivery — has developed to the point where retailers can quickly build and grow their own e-commerce sites. By leveraging their brick-andmortar stores and other offline resources， these retailers will create a threat to online-only players.

“O2O investment has great potential，” said Wang Xiao， founder of Unity Ventures and a former senior executive at Baidu Inc.

For instance， Unity Ventures and another angel investment institution Zhen Fund， invested in a food order website this year. Its software can be installed in cell phones and users can find the restaurant on a map and order food.

There are similar websites abroad such as JustEat.com and GrubHub. com. They are global market leaders in the online ordering of takeaway food.

According to Wang， O2O business provides dealers with free online stores， more clients and orders， as well as marketing. Customers find it more convenient and have more choices and can see comments left by other customers.

“Every sector will be changed by O2O，” said Ling Daihong， an angel investor and founder of Infotech Printing Machine Co Ltd.

Ling has been an angel investor for more than a year， having put money into 15 O2O companies. One of them sells discount branded spectacles online. People can select several designs. The company then sends out an assistant to the prospective customer’s home or workplace with the selection. If he or she chooses to buy any of the glasses， the company will package pristine originals and send them to the customer.

In China， Ctrip.com， established in 1999， is one of the earliest O2O companies. It delivers information online but payment and services are completed offline. Group-buying companies deliver information and process payments online.

Globally， car rental， travel and information service companies were among the first businesses to make use of O2O.

Zero2IPO Research Center believes car rental， food， travel and hotel accommodation have enormous potential in the O2O sector in China.

Government aims to double e-commerce sales

China aims to double the value of its e-commerce sales to 18 trillion yuan($2.86 trillion) by the end of 2015， according to an E-commerce 12th FiveYear Plan (2011-15) released by the Ministry of Industry and Information Technology， the nation’s top industry regulator.

The ministry said the government will encourage large companies to move their businesses online. Besides， it will foster the development of third-party purchasing systems online to encourage small and medium-sized companies to adopt e-commerce.

“Shopping centers， whole sale markets and supermarkets should create online stores to reduce their costs and develop product-tracking systems，” the ministry said.

E-tickets are something else that the government will place a greater emphasis on to improve the country’s public transport system.

The plan also says the ministry is targeting markets overseas.

Even so， there are some difficulties in the market， the ministry said. Online shopping services and legislation need to be improved.

China sought public opinions recently for its first law regulating the e-commerce market in a move to curb trade in counterfeit goods and further protect consumer rights.

The law aims to enforce registration and licensing among numerous sellers in China’s booming online business， a group largely untracked by authorities， said Cao Lei of the China E-Business Research Center， an entity authorized by the State Administration for Industry and Commerce of China to draft the legislation.

There may come a new type of license exclusively for online sellers， Cao said. Without the licensing， fake goods go rampant.

The law， which is expected to be enacted within the year， will address the mounting complaints of consumers unfairly treated in ill-regulated online transactions.