Author: Mei Ling Tan

The second World Internet Conference (WIC), also known as the Wuzhen Summit, will take place Dec 16 -18, in Wuzhen, Zhejiang. Chinese President Xi Jinping will attend the conference and address the opening ceremony. It takes place amid dramatic expansion of Chinese e-commerce, thanks to great market potential and the government’s supportive policies.

In early spring, the State Council, China’s cabinet, announced it will boost e-commerce by cutting red tape and liberalizing investment regulation in the sector. Meanwhile, Premier Li Keqiang said that with the “Internet Plus” strategy China would back e-commerce development and guide the Chinese internet companies’ international expansion.

In the mainland, e-commerce and other internet-based industries are supporting and accelerating the rebalancing of the Chinese economy toward consumption and innovation.

In early November, transactions on the Singles Day — the Chinese version of the Valentine’s Day — morphed into a huge shopping extravaganza as the mainland consumers’ buying spree caused sales to soar almost 60 percent from last year. Although Alibaba, the e-commerce giant, started the online festival only seven years ago, its total sales alone climbed to 92 billion yuan (US$14.3 billion).

To put the figure into an international perspective, it is more than quadruple the US earnings last year from its Black Friday and Cyber Monday sales events combined. Not surprisingly, Alibaba’s founder Jack Ma believes that Singles Day will go global.

“In the next five years, I believe it may be in Tokyo, Paris or New York,” the e-commerce entrepreneur said.

Chinese e-commerce is driven by heavy online buyers, younger demographics, and consumers in the relatively wealthier first-tier cities – although relative growth is even faster in many lower-tier cities and rural areas.

These internet-based industries fuel the government’s 13th five-year plan that was officially outlined a month ago. Until recently, Chinese growth relied on investment and net exports, but that era ended with the global financial crisis. The new objective is to rebalance the Chinese economy toward consumption.

Threat to traditional retailers

Not everybody has benefited from Chinese e-commerce explosion, however. As the record sales on Single’s Day showed, online retailing poses an increasing threat to those brick-and-mortar retailers that continue to stay mainly offline.

For the leading department store operators in China, online retailing remains limited and sales growth is weak. While Intime Retail may be best positioned to benefit from online retailing – not least because of its strategic cooperation with Alibaba – several other companies, including Golden Eagle Retail, Parkson Retail and Maoye International Holdings are only getting into the game.

Golden Eagle and Maoye have collaborated with Tencent through the WeChat social platform, whereas Parkson has introduced an online shopping site.

The explosion of Chinese e-commerce has caught off guard not just domestic retail leaders but international industry giants. Initially, these Western giants attributed their losses to China’s growth slowdown and the pullback by shoppers, which presumably accounted for their shrinking profit margins.

However, the rapid explosion of e-commerce and the rising share of consumption in the Chinese economy cast doubt over such interpretations. Most importantly, a closer look at retailing trends in China suggests that it is not Chinese consumers or Chinese economy that accounts for the losses of these international industry giants – but competition.

The famed Unilever, for instance, saw its sales fall off the cliff because it failed to go online fast enough. In June, Swiss food giant Nestle acknowledged that it failed to understand how retail was changing in China. The failure to move quickly and broadly into online retailing proved costly: the company had to burn instant coffee it could not sell in stores.

The same goes for Colgate-Palmolive and Germany’s Beiersdorf, which have been suffering from offline overstocking, even as new online retailers have reaped enormous earnings.

Intriguingly, some of these international giants have missed much of the Chinese e-commerce explosion, even though many have experienced two decades of e-commerce growth in the US, Europe and Japan. In these advanced economies, the e-commerce explosion took place differently, however.

In the prosperous West, the Internet revolution initially relied on fixed-line personal computers and notebooks. In the emerging and developing East, such technologies remain relatively expensive. In these nations, the initial penetration has been fueled by mobile devices, particularly smartphones. In China, mobile drives retail sales growth and currently accounts for half of all e-commerce sales.

The lessons are clear. First, business models that succeed in advanced economies may not work in emerging and developing economies. Second, advanced-economy lessons are vital but they must be adjusted to the Chinese business environment. Third, simple imitation of Western strategies does not ensure success in China. Only innovation can produce the desired results.