Caixin
Jul 13, 2018 03:37 PM
OPINION

Opinion: How Did China Leapfrog Everyone in E-Commerce?

Anyone visiting China will be struck by how quickly consumers there have digitalized. Everyone pays for pretty much everything with their phone. Some shops and cafes have stopped accepting cash and no longer stock inventory, preferring instead to deliver your purchase to your doorstep. If you feel like an iced tea at work, you open an app rather than taking the elevator down to the convenience store. Street beggars carry QR codes so they can take charitable donations from passersby.

Considering the country’s level of economic development, this is a total surprise. Business-to-consumer (B2C) e-commerce penetration in China, as measured by the share of retail sales that are transacted online, far exceeds that in any other market in the world. How is it that China, which is on a par with Iraq in terms of per capita gross domestic product, has managed to leapfrog its more technologically sophisticated counterparts in the developed world?

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There are two ways to think about this phenomenon. The first posits China’s e-commerce giants as pioneers and Chinese consumers as tech-hungry shoppers, both blazing a trail for the rest of the world. Yet China doesn’t stand out when it comes to the speed of its internet networks, levels of smartphone/computer penetration, digitalization of businesses or the tech-savviness of its population. Alibaba was hardly the world’s first e-commerce platform.

The second, more plausible explanation is that the traditional brick-and-mortar (B&M) retail and distribution industry has failed to deliver, literally. As is often the case with technological leapfrogging, the explanation lies not in what the market in question was doing well, but rather in what it was doing poorly.

To understand China’s retail problem, imagine you are a food producer trying to enter a market. In the U.S., if you made deals with the four largest grocers (led by Walmart), you would have access to roughly half of the U.S. food market. In China, by contrast, the top four grocers would gain you access to only 5.7% of food retail spending.

The result is a headache for companies and consumers alike. For consumers, access to products is difficult if you’re not in the right city. Producers, meanwhile, struggle to find distributors that will help them to achieve the kind of scale they need. Serving the Chinese consumer market is a tooth-and-nail geographic battle that involves trying to manage a large network of regional wholesalers selling to other regional wholesalers five or six times before products reach store shelves.

Enter Alibaba, which, for the first time ever in Chinese history, provided a nationwide platform from which to sell to China. Within the space of a few years, consumers in the farthest-flung corners of the country suddenly had access to virtually any product they wanted. Businesses were able to tap into unmet demand in lower-tier cities by working with just one distribution partner.

E-commerce’s success in China is ultimately owed to the fact that it was a well-timed solution to the inability of retailers and distributors to consolidate and achieve national scale. Sellers were thus quick to adopt online channels as an alternative. The explosion of choice online then quickly led to consumers switching their shopping behavior.

This is not just an academic observation. It carries real-world implications for businesses. The reason so many Chinese consumers shop online is largely due to lack of availability in the offline world, rather than an obsession with clicking “add-to-cart” on a website. This is confirmed by the fact that e-commerce’s share of sales in larger Chinese cities (where there are more shops) is lower than in small cities. That means that B&M retail still has tremendous room for growth in China.

Regrettably, many companies in China have been so stunned by the rapid rise of platforms such as Alibaba and JD.com that they have begun shying away from further investment in B&M networks, thus making e-commerce’s success a self-fulfilling prophecy.

Businesses in China should recognize e-commerce for what it is: a marvelous solution to an age-old market inefficiency. However, that does not mean it will replace B&M entirely. Chinese consumers, irrespective of where they live or how much they earn, want to go to the mall with their friends, try on clothes and eat ice cream just like everyone else.

Alexander van Kemenade is the Asia director of consulting at The Economist Intelligence Unit.

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