E-commerce bigger in China than United States

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    What to know about business in China

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  • Unlike U.S., China has not been penetrated by organized retailers or brands yet
  • David Wei predicts by 2014, China's e-commerce will have bigger gross merchandise volume
  • E-commerce model needs to be different, Wei writes

Compared with their U.S. peers, Taobao versus eBay, JD.com versus Amazon, Suning vs. Walmart, the Chinese leading e-commerce players have a much shorter history. However, they will take a bigger e-commerce share from the overall retail space soon.

Unlike in the United States, most smaller cities in China have not been penetrated by organized retailers or consumer brands yet. This offers an opportunity for e-commerce to become the mainstream retail format for these cities.

Another reason is that the cost of commercial property in China went up significantly in the last decade. Thus, consumer brands and retail merchants are more encouraged to migrate online while in the United States, offline to online migration is mainly driven by labor cost and efficiency request. If not in 2013, no later than 2014, China's e-commerce will have a bigger gross merchandise volume than in the United States. Please be aware that China's total retail sales is still much smaller than the U.S., which further demonstrates that e-commerce's share in China will be much more significant.

David Wei, who appears in this months' episode of "On China," is a former CEO of Alibaba.com.

2015, a breakthrough year for e-commerce in China

Why 2015? We need to understand the emerging cyber history in China. Almost all of China's leading Internet players' birthdays are in 1999, including Alibaba, Baidu, Tencent, Sina and Sohu, etc. In other words, there were no Internet applications until 2000.

People born on or after 1980 were over 20 years old in by 2000. They started to get access to the Internet mostly after their campus lives. We call them a generation working in Internet.

Take a look at people born on or after 1985. They were teenagers in 2000 when the Internet was just getting started in China. This post-1985 generation is one that lives on the Internet, and started from social, gaming to almost everything. By 2015, this post-1985 generation is reaching their 30s and becoming the core consumer group for almost every category. They have already migrated to the virtual space and they are the mainstream consumption power in China.

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    E-commerce will take such consumption power and make offline retail even weaker.

    Different ecommerce business model is a MUST

    Although I put Taobao.com versus eBay, JD.com vs. Amazon.com, Suning versus Walmart into respective peer group, they do not run the same business models and they don't even look similar anymore.

    Why the e-commerce model needs to be so different, we need to answer this question from a consumer angle and a merchant angle.

    As we mentioned above, Chinese Internet consumers are younger, and they're not mainstream yet. Most of them have never been served by organized, retailed or consumer brands yet.

    Taobao.com can evolve from an online flea market to T-mall and become the shopping entry portal, while eBay finds itself having difficulty getting rid of its secondhand products from its auction site. From a merchant's point of view, there are millions of small but professional merchants in China, they will not just fill up Taobao.com but they will also flood into JD.com and Suning.com and become a major sales force in China.

    Any e-commerce platform's success depends on winning these millions of merchants and they will make the pure online retail model very difficult in China.

    Behind these millions of merchants are hundreds of thousands of factories in China. This is why such phenomenon does not exist in the United States where you can hardly find any manufacturers. The monetization model in China for e-commerce is also very different.

    Advertising model is better accepted by millions of small merchants rather than transaction fee or listing fees.

    Even service powered by e-commerce needs a different model and will have a different future. When Groupon is under challenge in the United States, I believe that few Chinese survivors, like Meituan.com, from thousands of Chinese Groupons will have a brighter future than its original.

    The brighter future is based on at least one-third of restaurants and other small and medium business changing hands every year and their ongoing marketing demand will offer companies like Meituan.com almost endless merchants list for promotion. On the other hand, the price sensitive consumers will be addicted to such service.

    Winning tips for foreign players in China

    Google, Yahoo, eBay, Amazon, and Groupon, as part of a very long list of U.S. Internet and e-commerce giants, have tried different ways through set-up by themselves, acquisition, joint venture with local key players, none of them can claim any success in China yet.

    Unlike other Internet applications, the e-commerce sector is least regulated and restricted by Chinese authorities in comparison to other Internet verticals. In my opinion, U.S. players cannot offer the real value to local consumers since their global technology and supply chain advantage cannot be leveraged in China.

    The cross-border management slows down the quick reaction required in this fast-moving market.

    My advice for U.S. players is to humbly buy in minority shares in some emerging Chinese e-commerce players and focus on cross-border synergies, such as cross-border tourism, education or shopping behaviors, etc. These cross-border activities will be growing more rapidly and such synergy can really leverage U.S. peers' strength and offer real value to Chinese consumers.