E-Commerce: China’s Great Gateway

Nearly half a billion online users and an industry with a turnover of US$80 billion in  2010, up  87 per cent year-on-year – China’s e-commerce numbers are staggering. Yet UK companies hesitate to enter this highly lucrative market, fearing  insurmountable legal, technical and competitive barriers. However, research shows this view is no longer applicable. For UK companies entering China, e-commerce is the most dynamic way to reach the world’s biggest market.

Competing with Giants

Some of the world’s largest internet companies dominate China’s e-commerce  market, such as Alibaba Group and their wildly successful Taobao consumer-to-consumer platform, the search engine behemoth Baidu and the “Amazon of  China” Dang Dang. They control vast tracts of the online market, a daunting prospect for foreign companies seeking to stake their claim. After all, Baidu has bested the mighty Google, whilst Taobao’s sellers currently account for more than 70 per cent of
the country’s online transactions.

These companies have paved the way for global competitors. By taking the risks,  creating the infrastructure and developing consumer trust in the market, they have made it easier for foreign companies to plant their flags.
Duncan Clark, former Chairman of BritCham and Chairman of consultancy
firm BDA China, believes UK companies analysing China should stop seeing a new market and start seeing a developed market that has online structures ready for use. “For instance, Taobao started as a group of very small merchants selling to  individuals,” says Clark. “Now they have an area called Taobao Mall where big brands can set up and sell directly to consumers.”

Not Just Online Selling

Online selling creates a host of other opportunities for UK companies, such as  developing and marketing websites. “When companies such as Tesco or other well-known UK retailers look to develop a web presence in China, they will often need web development and technical assistance,” says Clark. Investors and venture  capital companies can look for opportunities of their own. “US investors invest in Chinese online companies, but UK investors have not shown so much interest,” he says. “Backing Chinese entrepreneurs can not only help UK business by developing the market further, but also offer excellent returns.”

Increasing Awareness

In spite of the potential, companies worldwide are only now beginning to enter the  market. In 2010, clothing retailer Gap established both an e-commerce presence
and its first retail stores in China. The Japanese cosmetics brand Shiseido has proposed an e-commerce launch, while fashion brand Bally’s has an exclusive China partnership with Italian e-commerce powerhouse Yoox.

UK government and business community support are actively encouraging  companies to look at China’s e-commerce opportunities. On his recent visit as delegation head attending the UK – China Internet Forum, Ed Vaizey, Minister for Culture, Communications and Creative Industries, remarked “The UK places great
value on its relationship with China in the electronic communications sector. Both the UK and China should continue to seek closer cooperation on the key issues.”

These key issues, according to both Ed Vaizey and UK Foreign Secretary William Hague, who will be hosting the London Cyber Conference in November, are about making sure that cyberspace remains a safe,  open forum where ideas and  innovation can flourish and ensuring a fair return of investment in network, services and content.

Legal Wrangles

But while entering the market is increasingly attractive, barriers still exist. Online payment used to be an issue in China, but the likes of Alipay, Tenpay and other
providers have rendered the process comparatively convenient. “Ten years ago, e-commerce didn’t take off because there were problems with online payment and
consumer trust of businesses,” says Clark. “The implementation of ranking systems to empower the consumer and efficiency of current online payment platforms has
changed all that.” However, legal issues still exist in terms of foreign ownership and investment in online payment services. The directive “Measures for Management of Non-financial Institutions’ Payment Services (PBC Decree [2010] No.2)” from the People’s Bank of China has stymied the hope of foreign players to own a piece of the online payment market, now or in the future.

More pressing concerns are those of ICP licensing, which must cooperate with a  domestic entity or individual. However, a Variable Investment Entity (VIE) offers an alternative; while licences remain in China onshore, revenues are channelled to an offshore entity. VIEs allow China’s foreign investors or companies to obtain control as well as economic interest in operations they cannot actually own. VIEs have come under some scrutiny since Yahoo lost its interest in Alipay under regulatory  challenges, but problems at this stage seem focused on payment and content  providers rather than e-commerce. “Content and payment are seen as sensitive,
but e-commerce is far less risky in terms of regulatory issues,” says Clark. “So far VIEs have served most foreign companies and investors extremely well.”

Despite this, there are growing concerns that VIEs are becoming more unstable.  There are other ways to enter the market though, as Richard Unwin, Director of
website branding and e-commerce company Backbone IT Group, explains. “Our Our soon-to-be launched Ashton Lord portal allows luxury Western-made brands to  market directly to the Chinese market. An agreement with a Chinese payment provider allows customers to pay in RMB, but the Western businesses can then
receive their revenue in US dollars or pounds sterling. This avoids any problem with VIEs and allows companies to really access the online market in China with the minimum of difficulty.”

New Ways to Reach Consumers

Short-term issues aside, retailers can make significant gains in the e-commerce market; even now, many are increasing their brand awareness in China. “The online
market is now more dynamic than the offline market,” says Clark. “It allows companies to avoid many of the offline inefficiencies that can be a problem in China.”
Andrew Clarke, Director of the Nanjing office of Backbone IT Group, agrees. “The future potential is truly staggering,” he says. “China will soon have more internet users than the whole of Europe and the USA combined, and millions more are  flooding on every month. In short, it will become by far the world’s biggest single internet market.”

Companies are establishing their online presence even before they start their actual selling, giving them a platform on which to build. Audi and Burberry have enhanced their prestige through online marketing, while a number of brands and celebrities use the popular social networking site Weibo – China’s Twitter – as a marketing tool,  anticipating future online and offline sales expansion.

Be it branding, building a web presence or selling to Chinese consumers online, the Chinese market represents boundless opportunity for UK companies. Legal barriers and dodgy partnerships can present challenges, but the e-commerce market is a  strong consideration for companies looking to expand into China.

 

This article was taken from China-Britain Business FOCUS, a monthly magazine published by the China-Britain Business Council for its members.

The China-Britain Business Council helps companies of all sizes from all sectors to do business with China. Find out more at www.cbbc.org

Sectors: Online Retailing, Technology, and Wholesale & Retail
Countries: China and Far East
Topics: Getting Started and Sales & Marketing
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