China to Be World’s Largest E-commerce Market

China is set to become the biggest online marketplace in the world within the next few years， as quite a number of studies showed.

China’s e-commerce market brought in$928 billion in trades last year， registering a 29.2 percent year-on-year increase， according to Jiang Yaoping， vice minister of commerce of the country. E-commerce represented 12.5 percent of the country’s gross domestic product (GDP) in 2011， the minister said at the 12th China International E-commerce Conference held in Beijing.

China’s online retail market took in more than $118 billion， up by 60% from 2010， which accounted for more than 4 percent of the total consumer retail market， Jiang added. By comparison， e-retail in the U.S. grew 16.1% in 2011 to $194.3 billion and accounted for 4.6% of all retail sales， according to the U.S. Department of Commerce.

The ministry released a report in May on the development of e-commerce in China in 2011 which noted the number of online shoppers in China reached 194 million in 2011， more than in any other country. The report also predicted the country would become the top e-commerce market by 2013. If proven true， this would be two years ahead of predictions by the Boston Consulting Group published in November 2011.

Boston Consulting Group predicts that by 2015， China will surpass the United States to become the largest e-commerce market in the world， reaching more than RMB 2 trillion in online retail sales. Consumers in China will be spending $1，000 per year online — the same amount as U.S.’s 170 million online shoppers currently spend annually. By that time， e-commerce would account for more than 8% of all retail sales in China.

The Ministry of Commerce reported that the strongest online growth last year came in sales of food， apparel and jewelry. As in the U.S.， web sales in China are growing much faster than sales at physical store sales: China’s total retail sales grew in 2011 about 17.1% over the prior year to $2.88 trillion， the ministry reported. Total U.S. retail sales grew 7.9% in 2011 over 2010， the U.S. Commerce Department said.

Factors driving the growth

A number of factors are driving the growth. As Mashable reported， one is the increase of China’s middle class， which is expected to balloon from 200 million to 800 million people over the next 20 years， according to Acquity Group. The spread of government-subsidized， high-speed Internet access and Internet-connected cellphones have widened the pool of potential shoppers to 513 million — or about 40% of the population. Broadband Internet access costs around $10 per month， compared to$30 per month in India and $27 per month in Brazil.

The low cost of shipping in China gives ecommerce an ongoing boost. It costs $1 on average to ship a 1-kilogram parcel， versus $6 in the United States. China lacked a reliable and cheap method of shipping packages， so the e-commerce industry has invested in developing one. Shipping prices and reliability have been improved， particularly in urban coastal cities. China’s major online marketplace， Alibaba-owned Taobao， is estimated to account for half of all packages shipped in China.

Who are buying?

According to the Boston report， less than 10 percent of China’s urban population shopped online in 2006. The figure jumped to 23 percent in 2010 and will nearly double to 44 percent by 2015.

An astonishing 30 million additional Chinese consumers are expected to shop online for the first time every year until 2015.

Within five years， most of today’s online shoppers in China will be spending about $980 per year， twice what they are today. That’s close to the U.S. average of $1，000.

People in China shop online for three main reasons， according to an Acquity Group survey conducted among 1，000 people across roughly 150 cities last year. One， greater product selection. The survey by BCG found that a quarter of Chinese shoppers buy online because they can’t get the products they want at brick-and-mortar stores. Two， the ability to compare prices across vendors: 65% of respondents said they compared retailers before making a purchase. Three， convenience.

The relationship between search engines and retail sites is different in China. In most markets， shopping begins with a Google search. In China， online retailing marketplace Taobao.com blocks the spider of the top search engine， Baidu.com. Therefore， most shoppers start their search within Taobao， which accounted for over 70 percent of China’s e-commerce volume. “Chinese shoppers are developing the habit of not relying on search engines to find products online，” said Jeff Walters， a Beijing-based principal at BCG and coauthor of the report.

Largely because of consumer wariness and distrust of merchants， Chinese consumers are the most likely in the world to check for product recommendations on social networking sites as well as on-line shopping websites. Forty percent of online consumers in China say they’ve read and posted reviews — more than double the rate in the United States. Conversely， only 19 percent of consumers in China go to official brand or manufacturer sites， compared with 41 to 60 percent in Japan， the United States， and the European Union.

Still， e-commerce is a young industry in China. Although more people are shopping online in China than the U.S.， penetration is much lower， relative to the population; only 14% of China’s 1.3 billion residents shop online， compared to about 54% in the U.S. Chinese shoppers are also gravitating towards lower-priced items.

The major players

The three big Internet companies in China are Alibaba， Baidu and Tencent， which dominate three different categories of the market: e-commerce， search and messaging， respectively， according to Mashable.

The vast majority of online transactions in China — 80% as of 2010 — take place between consumers， according to AK Kearney’s estimates. Approximately 90% of those transactions are executed on Alibaba-owned Taobao， frequently described as the “eBay of China.”

Like eBay， users on Taobao can purchase and sell new and used goods at fixed or negotiated prices， as well as through auction-style listings. Unlike eBay， most goods are new， and there are no listing or transaction fees — the majority of Taobao’s revenue comes from advertising. Next year， the company will bring in $716 million in pre-tax earnings and will be worth $14.3 billion， according to estimates from Goldman Sachs.

Business-to-consumer retail is quickly gaining steam online， however. AK Kearney estimates that B2C transactions will make up 40% of the market by 2015.

About half of B2C transactions currently take place on Taobao Mall， or Tmall， another Alibaba property. It features products from 70，000 brands， half of which operate their own stores on the site. The company says it has 25 million registered users. Unlike Taobao， Tmall charges businesses fees for transactions. An estimated $16 billion in sales was generated on Tmall in 2011， a figure BCG expects will double this year.

Together， Taobao and Tmall were responsible for 81% of online transactions by dollar amount in 2010. Forty-eight thousand products were sold per minute on Taobao that year， more than the number sold by China’s top five brick-and-mortar retailers combined.

More than 60% of buyers on Taobao and Tmall pay for their transactions using Alipay， a payment system comparable to PayPal. Twenty percent of transactions on B2C sites are also paid for using Alipay.

Other players in the space include 360buy. com， a multibrand retailer often described as the online， Chinese equivalent of Best Buy. It is the second largest B2C site in China， generating around $5 billion in sales in 2011. Individual brands are also setting up shops to sell directly to consumers.

Challenges ahead

The biggest problem holding back China’s e-commerce for years was a lack of trust. Consumers worried that online firms were fraudsters， or that their credit cards would be abused， or that purchases would get swapped for counterfeits during shipment. Alibaba overcame this by creating Alipay， a clever online arrangement that — unlike eBay’s system — releases payments to vendors only after clients confirm that they are satisfied.

But still， Chinese e-commerce websites are targets of hackers and on-line shoppers often fall victim.

Although shipping infrastructure is improving in China， it still has a long way to go， particularly outside major cities. Literally thousands of Tier 3 and Tier 4 cities do not have the logistics or supply chains to make products easily available locally.