LI & FUNG RESEARCH CENTRE China Distribution & Trading I. II. Overview III. Competitive Latest developments landscape IN THIS ISSUE: Revisiting the online retailing market in China Market overview Online retailing continues to register stunning growth in the first half of 2010; it is estimated that the online retailing market size will exceed 1,000 billion yuan in 2013 Young and female consumers embrace online shopping Online retailing is the most popular in first-tier cities Apparel, bags and accessories are the most popular online retailing category Competitive landscape C2C transactions dominate China s online retailing scene, but B2C transactions are growing more rapidly China s homegrown companies have strong performance Taobao is the distinct leader in C2C market with more than 80% of the market share China s B2C market is more fragmented with the top 10 players accounting for 70% of the total market share 11/F, LiFung Tower 868 Cheung Sha Wan Road Kowloon, Hong Kong Tel: (852 2300 2470 Fax: (852 2635 1598 Latest developments Competition looks set to intensify, especially in the B2C market Profitability of online retailing platform operators remains under question; currently, drawing traffic seems to be players top priority Online retail operators strive to enhancing logistics and distribution capabilities Online third-party payment continues its strong growth; online retail platform operators also offer a wide variety of payment methods Group purchase websites grasp widespread attention Investors are riding the Internet boom in China Mobile phones and television emerge as new platforms for online retailing Taobao sets foot in Japan; but tapping the domestic market remains the predominant focus of China s online retailers The Chinese government supports e-commerce developments E-mail: lfdc@lf1937.com http://www.lifunggroup.com
Revisiting the online retailing market in China Online retailing in China has come a long way since it began about a decade ago. Offering convenience, lower prices, and wider selection, online retailing has demonstrated stellar growth over the past few years; it is particularly popular among China s young and tech-savvy generation. The rise of online retailing has brought tremendous opportunities as well as challenges to retail and commercial businesses in China. A growing number of businesses in China are now leveraging on the Internet platform as a doorway to diversify their sales and marketing channels. The bricks-and-clicks model is increasingly common. On the other hand, competition is intensifying as consumers gain exposure to highly transparent prices and much wider range of products. A wide array of competing business models in China s online retailing market has now emerged, bringing new changes to China s commercial landscape. But the game is still early it is expected that the size of online retailing market will expand from 263 billion yuan in 2009 to 1,000 billion yuan in 2013. In this report, we will provide you with a market overview, the competitive landscape and the latest trends of online retailing in China. I. Market Overview 1. Online retailing continues to register stunning growth; it is estimated that the online retailing market size will exceed 1,000 billion yuan in 2013 According to iresearch, transaction value of China s online retailing 1 market reached 263 billion yuan in 2009, registering a stellar 105% year-on-year (yoy. Growth momentum of China s online retailing market continues to be strong in the first half of 2010 transaction value of online retailing grew by 114.8% and 97.5% yoy in the first and second quarter of 2010, to reach 100.6 and 111.2 billion yuan respectively. 1 According to iresearch, scale of online retailing market is the sum of customer-to-customer (C2C and business-to-consumer (B2C transaction value. Scale of C2C online retailing market is calculated by the total value of purchases, including that on the B2C arm of C2C platforms. Scale of B2C online retailing market has excluded download payments of digital products, air tickets, online pill payment services as well as offline sales of B2C platform operators. 2
Exhibit 1: Transaction value of online retailing, 2001 2009 300 250 billion yuan 200 150 100 50 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 Transaction value of online shopping Source: iresearch Expanding Internet population is one of the key drivers behind the impressive growth of online retailing market in China. According to the China Internet Network Information Centre (CNNIC, China s Internet population reached 384 million at the end of 2009, grew by 28.9% yoy. China s Internet population is today the largest in the world; its size is more than that of the United States and Japan combined. Internet penetration of China was 25.5% in 2009, slightly above the global average of 24.7%. As of June 2010, China s Internet population further climbed to 420 million; Internet penetration reached 31.8%. It is expected that China s Internet population will continue to grow steadily in the years ahead. Besides, for many Chinese consumers, there are big advantages of online shopping. The Internet has made prices highly transparent and offers products often not found in local stores, especially in more remote areas. By the end of 2009, the number of online shoppers increased by 45.9% yoy, reaching 108 millions, according to the CNNIC. Online shopping penetration reached 26% in 2009. However, penetration was still lower than that of developed markets, such as the United States (70%, South Korea (57% and Japan (53.6%. Online shopping penetration further increased to 33.8% by June 2010. In 2009, China s average online spending exceeded 2,400 yuan, increasing by more than 10 times than that in 2004. Despite all the astonishing figures, the game is still early. In 2009, online retailing accounted for around 2% of the total retail sales of consumer goods in China. Along with better transaction security and improving logistics, prospect of online retailing market in China is rosy. iresearch predicts that China s online retailing market will exceed 1,000 billion yuan in 2013, accounting for around 5% of the country s total retail sales. 3
2. Young and female consumers embrace online shopping According to the CNNIC, over 80% of China s online shoppers are aged 30 or below (see Exhibit 2. Youngsters tend to be more tech-savvy than their parents and more willing to embrace online shopping. On the other hand, a recent research conducted by CNNIC suggests that penetration of online shopping is highest among young professionals and university students, at 49% and 39% respectively. Exhibit 2: Age structure of netizens and online shoppers in China, 2009 60.00% 53.3% 50.00% 40.00% 30.00% 31.5% 28.4% 20.00% 20.1% 15.2% 13.9% 10.6% 8.5% 8.5% 10.00% 3.6% 3.9% 2.3% 0.00% 18 or below 18-24 25-30 31-35 36-40 40 or above Netizens Online Shoppers Source: CNNIC Males took up a slightly larger proportion (53% among the number of netizens in China. However, females are much keener on shopping online. According to the CNNIC, in 2009, 61.5% of female netizens has shopped online, compared to 38.5% of male netizens. Females are major customers of many B2C and C2C online shopping websites such as Taobao and Paipai. 3. Online retailing is the most popular in first-tier cities A recent research on online spending by Taobao reveals that, Shanghai online shoppers spent the most. Between May 2009 and May 2010, the 10 Chinese cities with highest online spending are Shanghai, Beijing, Shenzhen, Hangzhou, Guangzhou, Nanjing, Suzhou, Tianjin, Wenzhou and Ningbo. 4
However, the growth potential of low-tier cities in Central and Western China is not to be ignored. According to Taobao, 8 out of the top 10 cities with highest growth in online transaction values are low-tier cities in Central and Western China. 4. Apparel, bags and accessories are the most popular online retailing category According to iresearch, apparel, bags and accessories are the most popular online retailing category in China. 35.0% of online shoppers have purchased apparel, bags and accessories in 2009, followed by books and audiovisual products (15.2%, virtual cards (10.5%, cosmetics and skincare products (8.0% and IT products (6.1%. II. Competitive landscape 1. C2C transactions dominate China s online retailing scene, but B2C transactions are growing more rapidly According to Deutsche Bank and iresearch, China s online C2C and B2C transactions value totaled 248.5 and 14.5 billion yuan in 2009. C2C transactions have a lion s share in the China s online retailing market. However, it is believed that the actual size of the B2C market is larger as many smaller business sellers have registered as individual sellers on C2C platforms, so that they can eschew invoices, which in China is a method to evade tax. As more and more players pay efforts to grasp the B2C potential, it is believed the B2C transactions will demonstrate better growth potential in the future. Also, B2C players significantly win over C2C players by better quality assurance, legitimate product supply channels and stronger after sales services; they are increasingly favored by online shoppers who are more discerning and quality-conscious. Statistics from CNNIC suggests that customers had higher level of satisfaction towards B2C shopping platforms. Indeed, growth of B2C transactions has already outpaced that of C2C transactions in the past 2 years; meanwhile C2C transaction growth has dropped year by year since 2008. In 2009, the yoy growth of C2C and B2C transactions were 105.0% and 108.6% respectively, according to Deutsche Bank and iresearch. 2. China s homegrown companies have strong performance As shall be seen later, China s homegrown companies have stronger performance in China s online retailing market. Obviously Chinese companies have definite advantages in language, culture and local knowledge, giving them an edge in areas such as content selection, interface design, and sales and marketing, etc. Being able to better connect with customers gives them higher user stickiness. 5
This has posed tremendous challenges to foreign players adapting the Chinese market. In fact, entering China in 2002, ebay was once the market leader in C2C online retailing with market share of over 80%. The company used to charge commission from sellers on its platform, using the same model as in the United States. However, by pursuing a free-services-charge strategy and promoting itself as homegrown Chinese brand, Taobao has quickly eaten the market share of ebay. ebay later partnered with Tom Online to launch EachNet, and pulled the plug on its main China website (ebay.com.cn 目 錄 年 in 修 2006. 訂 版 外 商 投 資 產 業 指 導 Last but not least, the regulatory environment is more favorable to Chinese companies. Concerning the Internet is one of the most sensitive sectors in China, online retailing is put under the restricted categories for foreign invested enterprises in the Catalogue for the Guidance of Foreign Investment Industries (Amended in 2007 ( 題 的 通 知 商 務 部 辦 公 廳 關 於 外 商 投 資 互 聯 網 自 動 售 貨 機 方 式 銷 售 項 目 審 批 管 理 有 關 問 2007 promulgated by the National Development and Reform Commission. While foreign companies operating many other formats can get the approval from provincial-level Ministry of Commerce, foreign companies embarking on online retailing needed to have the blessing from Ministry of Commerce of higher level. In August 2010, the Ministry of Commerce issued the Notice Regarding Application and Approval of Foreign Companies in Online Selling and Selling via Vending Machines (, foreign companies wishing to conduct online selling businesses can now get the approval from the provincial-level Ministry of Commerce; the Notice also includes other clauses regarding the need to obtain other licenses such as the permits for operation of telecommunication business for platform operators selling third-party products and services. 3. Taobao is 淘 the 寶 distinct leader in C2C market with more than 80% of the market share 騰 趣 網 拍 According to Deutsche Bank and iresearch, China s online C2C transactions value totaled 248.5 billion yuan in 2009, up by 105.0% yoy. Exhibit 3 demonstrates the market share of major C2C players. With 170 million registered users in China, Taobao 2 (, owned by China s web giant Tencent ( has 網 訊 易 拍 is a distinct leader with a market share of 82.5% in 2009. The market share of Paipai (, was stable at 10.1%; while the market share of EachNet ( dropped from 8.0% in 2008 to 7.0% in 2009. According to iresearch, market share of Taobao has further climbed to 84.7% in 1Q 2010. 2 Revenue of Taobao Mall, online B2C platform operated by Taobao, was lumped into the C2C business in the iresearch statistics. We believe separating the C2C and B2C businesses of Taobao would give a more accurate account. (Taobao does not disclose the revenue of Taobao Mall; but according to iresearch statistics, Taobao had a 20% share of the B2C market in 2008. According to spokesman of the Taobao Mall, more than 40 million Internet users visited the site daily. 6
拍 拍 趣 易 百 度 有 啊 Exhibit 3: Market share of C2C players in China, 2009 Baidu Youa Eachnet ( ( 0% Paipai ( 7% 10% 寶 淘 Taobao ( 百 度 有 啊 百 度 83% Source: iresearch Many companies have tried to grab a slice of C2C market. Baidu (, China s largest search engine, launched its C2C site Youa.com ( in 2008. However, thus far it does not seem to pose any significant challenge to Taobao. On the other hand, attracted by the huge growth potential of B2C business, prominent C2C players have tried to leverage on their strong user base and set foot in the B2C market. For instance, Taobao has launched the B2C shopping platform Taobao Mall in early 2008; Paipai of Tencent has also started the B2C platform, Shop QQ; while Baidu has partnered with Japan s largest e-commerce player Rakuten to develop B2C business. 4. China s B2C market is more fragmented with the top 10 players accounting for 70% of the total market share 京 東 商 越 亞 馬 當 The B2C online retailing market in China is relatively more fragmented; and competition has intensified in 2009. The top 10 B2C players grabbed 70% of the total market share. And the B2C market landscape is changing fast. 360 Buy ( 城 卓, Joyo Amazon ( 遜 當 網 世 紀 電 器 and Dangdang (, 51 mdq ( 網 北 斗 手 機 批 吉 新 購 網, remained the top three players in 2009; however, many other top ten spots have changed in 2009. For example, 139 shop (, once regarded the most successful online clothing retailer in China, went into bankruptcy in 2009. On the other hand, Newegg ( entered the top 10 list in 2009. 網 批 has dropped out of top 10; PPG ( 蛋 易, Icson ( 7
網 上 城 京 東 商 器 世 紀 尚 電 網 書 夢 城 露 時 99read (99 Others 1.3% 22.4% 易 訊 360BUY( Menglu ( 麥 網 28.7% 0.7% 51mdq ( 子 紅 孩 當 當 越 亞 馬 遜 1.2% Icson ( 凡 客 誠 2.2% 新 M18 ( 2.3% Redbaby ( 3.3% VANCL ( 15.3% Dangdang ( Newegg ( Exhibit 4: Market share of B2C players in China, 2009 品 3.5% 6.8% 蛋 網 12.3% Joyo Amazon ( 卓 Source: iresearch Exhibit 5 demonstrates the brief information of major B2C players in China. As seen, many of the top B2C players sell a wide array of products on the websites to draw traffic in fact, some such as 360 Buy and Redbaby have evolved from being pure vertical players to online superstore operators. 51mdq is the only vertical B2C player. Meanwhile, Vancl operates a unique model by selling its own branded products. Exhibit 5: Brief information of major B2C players in China 京 東 商 城 B2C players Website Categories 卓 越 亞 Primary focus: electronics, home appliances, computers and accessories. Also covers home furnishing, kitchenware, apparel, 360 Buy ( cosmetics, watches and jewelry, baby items, food and beverage, http://www.360buy.com/ sporting goods, health and beauty Books, electronics, home appliances, kitchenware, health and Joyo Amazon ( beauty products, baby items, sporting goods, watches and http://www.amazon.cn/ jewelry, apparel and footwear 馬 遜 8
China 當 網 Distribution & Trading 蛋 http://www.dangdang.com/ items, grocery 客 誠 品 http://www.newegg.com.cn/ 網 孩 子 http://www.vancl.com/ houseware. 訊 http://www.redbaby.com.cn/ electronics 紀 http://www.m18.com/ 露 電 時 器 上 尚 書 網 城 http://www.icson.com/ footwear http://www.51mdq.com/ Home electronics http://www.menglu.com/ http://www.99read.com/chann el/index.html Dangdang ( 當 Newegg ( 新 Vancl ( 凡 Redbaby ( 紅 M18 ( 麥 Icson ( 易 51mdq ( 世 Menglu ( 夢 99read (99 網 Books, electronics, health and beauty products, apparel, baby Primary focus: electronics, computers and accessories. Also covers health and beauty products, baby items, home appliances, apparel and footwear, food, health and beauty, sporting goods, toys and stationeries, home furnishing Primary focus: own branded apparel, footwear. Also covers Primary focus: baby items. Also covers cosmetics, food, home furnishing, home appliances, health and beauty, sporting goods, Primary focus: apparel. Also covers health and beauty products, houseware, baby items, lingerie, accessories, cakes Primary focus: computer and accessories, electronics, home appliances. Also covers automobile accessories, apparel and Primary focus: lingerie, ladies wear. Also covers menswear, bags and accessories Primary focus: books. Also covers accessories, watches, apparel. toys and stationeries Source: Respective company websites, III. Latest development 1. Competition looks set to intensify, especially in the B2C market We expect competition in China s online retailing market continues to grow, especially in China s B2C market, as companies rush try to tap the B2C potential. Firstly, many pure-clicks retailers have continued their expansion. As mentioned, traditional C2C players such as Taobao have aggressively launched and promoted their B2C platforms. Apart from that, some existing vertical B2C players have expanded their product categories to draw more traffic and increase scale economy. For instance, Redbaby has expanded its product offerings from purely maternity and baby products to include also cosmetics, apparel, 9
household electronics and health supplements, etc. Dangdang, once an online book retailer, has positioned itself to be an online superstore. Vancl, in May 2010, launched another independent B2C apparel website V+ (http://www.vjia.com/ which runs on a completely different model. V+ is more like a traditional dealer selling branded apparel such as Nike, Adidas, Kappa and Giordano; V+ will manage operations for the apparel brands such as logistics and fulfillment. On the other hand, many traditional retailers have embarked on click-and-mortar strategy to extend consumer reach and reduce the upfront costs of setting up retail stores such as rentals, labor cost, overhead cost. They also have an edge over pure-clicks retailers as they can offer the touch-and-feel retail experience still important to many Chinese consumers. Having 馬 克 華 菲 said that, many traditional retailers lack the experience and expertise in running online retailing businesses. Besides, they have to pay extra attention to pricing strategy to maintain online and offline consistency in order to avoid online channels cannibalizing sales of their physical stores and potential conflict of interests with existing distributors and franchisees. To address the issues, some retailers have launched exclusive product offerings for online sales; some such as Uniqlo has identical pricing policy for both the online and offline channels; other players such as Markfairwhale ( deploy the online channel for clearance sales while the physical stores will focus on brand building. Not to mention the challenge of logistics distribution when traditional retailers extend their geographical reach, which is particularly true for retailers with limited physical store presences. Using third-party logistics service providers is an option; some others choose to limit the coverage of their online businesses, say, Carrefour runs its online businesses in Shanghai and Beijing only. Finally, many upstream suppliers and brand owners such as Haier and TCL are also exploring opportunities online, to reduce costs such as entrance fees levied by retailers. However, they face challenges similar to traditional retailers, such as pricing strategies and logistics distribution. See Exhibit 6 for the brief information of some new entrants in the B2C market. 10
Exhibit 6: Brief information of selected new entrants in the B2C market New B2C players 郵 樂 Website Categories Details Apparel and footwear, State-owned China Post will leverage cosmetics, houseware, health on its 46,000 post office locations in and beauty products, baby China while TOM Group markets the State Post 蘇 寧 and 易 購 items, electronics Web site and supports its operations Tom.com ( http://ule.tom.com/ Electronics, home appliances, Online platform of Suning Appliance cosmetics, health and beauty Co., Ltd., China s largest home 中 糧 我 買 網 products, sporting goods, baby electronics specialty retailer, mainly Suning ( http://www.suning.cn/ items, apparel and footwear focus on electronics Food and beverage Online platform by COFCO Limited, China's largest grain, edible oil and food conglomerate, mainly focuses on 飛 虎 樂 購 COFCO ( http://womai.com/ food and beverage Electronics, office stationeries, Online platform by Foxcomm home furnishing, apparel and Technology Group, the world's largest footwear, watches and jewelry, electronics contract manufacturer, 海 爾 商 城 Foxcomm ( http://www.efeihu.com/ baby items, sporting goods mainly focuses on electronics Electronics, home appliances, Online platform of Haier Electronics kitchenware Group Co., Ltd., China s one of the largest white goods manufacturers, Haier ( http://ehaier.com/ mainly focuses on electronics Source: Respective company websites, 2. Profitability of online retailing platform operators remains under question; currently, drawing traffic seems to be players top priority Despite booming online retail sales, many online retailing platform operators in China are still loss-making. Detailed financial information of many operators are not publicly available; however, industry experts believe that most online retailing portals, even prominent players such as JoyoAmazon and Vancl have not yet achieved break-even sales in China. It is reported that 360 Buy suffered a loss of up to 2 billion in 2009. 11
Cost of running online retailing platforms is high. According to China Venture estimates, initial investment for launching a B2C platform is above 30 million yuan. Major costs of online retail businesses include technological development (such as webpage and database maintenance, marketing and advertising, and operations such as logistics and fulfillments. Fierce competition is putting pressure on margins. As competition intensifies, major players have strived to improve user satisfaction and stickiness through promotions, service improvements and better after-sales services. Common promotional strategies including price discounts, and shipping cost reductions and exemptions. A lot of other players have also invested heavily to enhance user experiences, say establishing call centers to increase conversion rates and offering free product returns within specified period. Last but not least, players are spending huge sums of money on sales and marketing. For instance, Vancl is one of the biggest spenders on advertising; its expenditure on Internet advertising reached more than 200 million yuan in 2009. Beginning in May 2010, the company has spent tens of millions in offline advertising. Having said that, in comparison to most traditional retailers, which input costs tend to rise over time, online retailers can usually reap the benefits of technological progress as computational power, bandwidth, and data storage technologies improve in quality and decline in cost over time. Currently, drawing traffic to improve scale economy seems to be China s online retail players top priority. Indeed, successful online retailers may leverage on their scale to draw income from other sources such as selling technology, customer behavior statistics, and fulfillment and customer services capabilities to other parties. For instance, 360 Buy has claimed that 30% of its current income comes from other sources, such as advertising, and brand and event promotions. As sales increase, profits can come from a range of sources and are not limited to pricing. There is some goods news. Dangdang for the first time announced profitability in May 2009 after 9 years of consecutive losses; this boosts people s confidence in China s online businesses. Going forward, we believe online retailers selling own branded products have the highest chance of success, as they are more able to differentiate against competitors and avoid head-to-head competition. 3. Online retail operators strive to enhancing logistics and distribution capabilities China is huge and diverse. Fulfillment and logistics have long considered being one of the biggest challenges of online retailing operators. Most products are delivered to designated locations requested by customers by courier or mail; delayed shipment of goods still bothers many online retail giants. Indeed, the logistics flow of B2C online players is complicated as players often have to handle a much larger number of SKUs (stock-keeping units at a time this poses extra challenges on warehousing, sorting, picking and packing, etc. Online retailers also have to pay attention to other areas such as reverse logistics, payment collection on delivery, and attitude of front line staff. 12
Online retailers are striving hard to minimize problems in delivery, which hurts user experience and brand reputation. Major players have employed different logistics and fulfillment methods, such as handling in-house, outsourcing and partnership, depending on factors such as costs, investment outlay, operation scale and services coverage, etc. It is common for online retailers in China to use a combination of logistics and fulfillment methods. Although China s third-partly logistics industry has been developing fast in recent years, service level of China domestic logistics services providers still varies a lot and substantial monitoring is needed; on the other hand, services of international-standard logistics service providers are too expensive for many. As a result, some established online retailers such as JoyoAmazon, 360 Buy, Redbaby, Vancl and Newegg have chosen to handle logistics and fulfillment in house in key cities and outsource the logistics in more remote areas. For instance, 360 Buy has built its own distribution centers in 24 Chinese cities such as Tianjin, Suzhou, Hangzhou, Nanjing, Wuxi and Jinan. Vancl has built its own distribution centers in Beijing, Shanghai, Shenzhen and Guangzhou, and 物 流 several 寶 other distribution centre projects are underway in 10 Chinese cities such as Chengdu and Hangzhou; on the other hand, it also works with more than 80 third-party logistics service providers in China. Taobao, on the other hand, has also reviewed its logistics strategy and for the first time launched its online logistics platform (http://e56.taobao.com named Wuliubao ( in June 2010 to aggregate demand of logistics-related services. Through partnership with different services providers (including warehousing service, package delivery and software solutions, etc, the platform aims to offer one-stop package delivery services for its larger-scale online sellers. By working with Wuliubao, sellers can send and store their goods in centralized warehouses and distribution centers of Taobao. Once sellers receive orders on Taobao, the distribution center will then pick, sort and package the goods from the warehouse and notifying logistics service providers for picking up. Sellers can track their inventory and delivery status online. Taobao charges sellers a monthly service fee. In this move customers also benefit from lower logistics cost as they can now shop at various online stores and get their purchases delivered in a single package from a local delivery center, instead of paying for several packages previously. 4. Online third-party payment continues its strong growth; online retail platform operators also offer a wide variety of payment methods The increasing popularity of the third party payment systems in recent years has greatly facilitated online transactions in China. According to iresearch, China's online payment market reached 208.3 billion yuan in Q2 2010, up 86.8% yoy. Online shopping is the biggest component for China s online payment market. Online shoppers are increasingly confident towards online payment infrastructure. 13
付 寶 支 匯 付 Issue 天 下 財 付 通 72 September 2010 According to iresearch, Taobao s payment platform Alipay ( is the most popular third party online payment platform, accounting for 49.6% of the market share in Q2 2010. PaiPai s payment platform Tenpay ( came second, handling 20.0% of online payment; it was followed by China PnR ( with a market share of 6.5%. To facilitate online transactions, online platform operators in China also offer a variety of payment methods apart from local third party payment solutions. Fund transfer can be done via cash on delivery, payment via debit or credit cards upon delivery, online banking, bank transfer, postal remittance and credit cards, etc. We do not have detailed breakdowns on the statistics of payment methods. But industry experts point out that paying via third-party online platforms is the most popular for C2C transactions. Meanwhile, cash on delivery (COD and payment via debit or credit cards upon delivery are popular for B2C transactions. This is particularly true in less developed regions where customers are less familiar with advanced payment methods. For instance, Vancl is one of the online retailers which have the widest COD coverage; it offers COD solutions in 1,100 Chinese cities and counties. 非 金 融 機 構 支 付 服 務 管 理 辦 法 According to Deutsche Bank, most B2C online retailers usually require a deposit of 100,000-150,000 yuan from their carrier partners to provide payment upon delivery to reduce risks such as carrier thefts. To regulate the online payment market, the People s Bank of China launched the Administration Rules on Payment Services of Non-Financial Institutions ( in June 2010. Under the new rule, non-financial institutions must get a license 1 year after the policy came into effect on September 1 2010, in order to conduct third party payment transactions in China. Non-financial institutions must have a registered capital of RMB 100 million or above for a nationwide business license, and should have been making profits for 2 consecutive years. It is expected that the regulation will bring consolidation in the online payment market. 5. Group purchase websites grasp widespread attention 美 團 網 團 美 a group deal is achieved. Some prominent players include tuanmei ( meituan (. 米 手 網 Another important development in online retailing is the rapid rise of group purchase (tuanggou websites. The group purchase websites connect thousands of online users to sign up together to buy the same products to get bulk-discount. If a certain number of people sign up for the offer, the deal becomes available to all; but if a predetermined minimum is not met, no one gets the deal that day. Platform operators can earn commission from the goods or service providers if, and Currently, most of these websites offer services in limited number of cities. 網 糯, nuomi ( 網 拉, lashou ( Some believe the business model of group purchase websites make them easier to survive. Unlike other online platform operators which need to invest huge sums of money to build user base at the beginning, it is easier for group purchase 14
websites to achieve positive cash flow at the earlier phase. The geographical-focused approach should also be relatively easier for the operators to manage. China has a long tradition of group purchase and consumers are no strangers to the group purchase concept; it is not difficult for operators in China to find users hunting for bargains. According to Analysys International, the transaction value of group purchase websites is estimated reach 980 million yuan in 2010. But competition is heating up. Lured by the huge potential, many have joined the competition. China s three major portal website operators, Sina, Sohu, and QQ have launched their group purchase services by outsourcing the operation to smaller Internet companies; Taobao has also launched its group purchase service on ju.taobao.com. According to Analysys International, there are as many as 1,000 group purchase websites in China by July 2010; the number is expanding fast. It is expected that market consolidation will take place as marketing costs climb and it is growingly difficult for group purchase websites to bargain with goods/service providers. 6. Investors are riding the Internet boom in China Lured by the online retailing boom, investors have shown an increasing appetite for investments related to China s online 籃 網 寶 寶 媽 說 九 鑽 網 搖 retailing market. Since 2000, Dangdang has received capital injections by Kewen, Tiger Fund, IDG, Luxembourg Cambridge and Softbank China Venture Capital. It is reported that Dangdang is planning for an initial public offering in the United States by the end of 2010. 360buy has received capital injections by Capital Today, Bukk Capital, and a private company under Francis Leung Pak To. In recent years, jewelry online retailers 9diamond.com ( and maternal and children products online retailers, such as Redbaby, Babytree (, and yaolan ( have also received varying amounts of capital investments. 樹 媽, 0-6.com ( China s online retailing industry is fast growing; we expect that investors interest in the sector to remain strong in the future. Growing access to capital injections will fuel the expansion face of China s online retailers. Intensifying competition is likely to drive down prices and we believe consumers will benefit most. 7. Mobile phones and television emerge as new platforms for online retailing According to Accenture, 233 million Chinese Internet users have surfed on the Internet via mobile phones by the end of 2009, accounting for 60.8% of the total Internet users. Of which, around 8% of them only surf on the Internet via mobile phones. With increasing popularity of smartphones, Accenture predicts that users surfing online through mobile phones will grow by 85 million people per year in 2010 and 2011. The most often used mobile Internet applications in China are entertainment-oriented, such as online music, television and blogs. Today, it is quite popular among Chinese to use their mobile phones to make payment as well. Mobile 15
phones are now viewed as an emerging platform of online retailing. However, shopping online via mobile phones is still in an infant stage in China and its true potential remains to be seen. Online retailers are also exploring other media to reach out new groups of customers. For example, Taobao has partnered with Wasu Media Internet Limited, a subsidiary of Wasu Digital Television Media Group, to jointly launch an interactive digital television shopping. Consumers will be able to select goods and services on the Wasu Television Taobao Mall by using their TV from home. 8. Taobao sets foot in Japan; but tapping the domestic market remains the predominant focus of China s online retailers Taobao and Yahoo Japan have joined forces with each other to launch new shopping platforms catering to customers in both countries in June 2010, marking a significant step for China s online retail operators expanding services abroad. Japanese customers can now purchase products from small Chinese enterprises in the Yahoo Japan China Mall (http://chinamall.yahoo.co.jp/ and on the other hand, Chinese consumers can purchase Japanese products from TaoJapan (http://www.taojapan.com/. Nonetheless, the initial responses towards the Yahoo Japan China Mall are lukewarm. There are also complaints about pricing, high logistics costs, fake products, poor translation and descriptions of products. At present, we would say tapping the domestic market is the predominant focus of China s online retailers. Another renowned online retailer, Vancl, has expressed interests to enter the Japanese market; however, there is no detailed timetable yet. In fact, entering new markets requires a lot of time and resources, considering most of China s online retailers are still loss-making, it is reasonable for most players to focus at present on the domestic market. 9. The Chinese government supports e-commerce developments In recent years, the Chinese government has promoted Internet access in the country. In particular, it has invested heavily in telecommunications infrastructure in rural areas to bridge the digital divide, which is a definite plus for China s online retailing sector. The government has also shown supports towards e-commerce developments in the country. In December 2009, the MOFCOM issued a notice aiming to promote e-commerce developments in China. It is hoped that online transactions would account for more than 5% of domestic retail sales by the end of the 12th Five-Year Program. In particular, the government will support the online sales of several product categories including apparel, home electronics and appliances, furniture and home products, and books and audiovisual products. 16
路 商 品 交 易 及 有 關 服 務 行 為 管 理 暫 行 辦 法, To address the many problems facing China s online retailing sector such as counterfeit products, online frauds, and network and transaction security, the Interim Measures for Management of Network Commodity Trade and Related Services" ( 網 issued by the State Administration for Industry and Commerce, has come into effect on 1 July 2010. According to the measures, enterprises must provide their business licenses and related documentation to open any online stores; while individual sellers have to provide their identity information, including real names and addresses to the platform operators for verification. The measures also include clauses such as the protection of trademarks and intellectual property, etc. The measures shall help protect e-shoppers interests. However, some individual sellers have expressed worries towards real name registrations, which may imply the possibility of taxation of their online income in the future. Copyright 2010. All rights reserved. Though endeavours to have information presented in this document as accurate and updated as possible, it accepts no responsibility for any error, omission or misrepresentation. and/or its associates accept no responsibility for any direct, indirect or consequential loss that may arise from the use of information contained in this document. Reproduction or redistribution of this material without s prior written consent is prohibited. 17