China e-commerce whitepaper

China e-Commerce – A whitepaper from VAYTON & REBORN, Luxembourg ©2015
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e-Commerce:
China’s Great
Leap Forward
CHINA’S E-COMMERCE BOOM
Nowhere else in the world has e-commerce grown so rapidly in recent
years than in China. While China is the world's second largest economy, it holds
the largest share of the global e-commerce market (Barron’s Online, Nov., 2014).
New market opportunities for online retail sales and services in China seem
without limits.
Two key drivers contribute to this great leap forward in China. New
technological platforms, especially mobile phone applications, and changing
population demographics, namely income levels and urbanization, are fueling the
e-commerce boom in China.
Currently, the number of middle class Chinese residents with disposable
incomes exceeds the total population of the United States. The China E-
Commerce Research Center reported that e-commerce in China grew by 31.4

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percent to more than $2.1 trillion US dollars in 2014 (Tech In Asia, 2015). By the
first quarter (Q1) in 2015, China online shopping amounted to 757.41 billion
Yuan, up 45.2% from 2014. China’s e-tailing sales were about 10.7% of total retail
sales of consumer goods (iResearch 2015).
Both customer to customer (C2C) and business to customer (B2C) online
sales are thriving, with B2C growing by 65.4% from 2013 to 2014 at a rate twice
that for C2C. Morgan Stanly predicts that e-commerce in China within a few
years will comprise 18% of the country’s total retail sales – a considerable growth
compared to the current share of 8%. In just five years by the end of 2015,
according to iResearch, the consumer base will grow at a faster rate than in the
US.

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Few barriers to anytime, anywhere e-shopping remain. Initially, cross-
border e-commerce in China faced problems of international payments, shipping
logistics and language (Alibabagroup news, 2015). The Forbidden City gates for
international e-markets have been unlocked with improved technology platforms
developed by Chinese companies like Alibaba Group. The number one cross-border
e-commerce company in China, Alibaba.com developed Taobao for C2C business
comparable to eBay and Tmall for B2C transactions comparable to Amazon.
Mobile payments are easily facilitated through Alipay, which garners 78.5% of the
third-party mobile payment market share in China (iResearch, 2015). While, high
mobile Internet use can be expected in the cities, Alibaba Group and rival JD.com
(JingDong) are tapping into a new and emerging e-consumer base in rural China
where mobile Internet use is on the rise.
Fast Facts: Cross-Border e-Commerce in China
 China’s middle class today is equal in size to the entire U.S. population and
is expected to reach 630 million by 2022.
 Concerns about product safety feeds demand for imported goods with
perceived better quality control. Chinese consumers are looking for
products made outside of Mainland China.
 Chinese consumers are discovering they can go online to buy goods
directly from foreign companies. These cross-border purchases by China’s
online shoppers grew ten-fold between 2010 and 2014, from less than $2
billion to more than $20 billion.
 China's rural Internet users numbered 178 million as of June 2014.
Source: Alizila e-Commerce News, 2015

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Mobile phone use is linked to the success of e-commerce. In China,
consumers choose mobile technologies over the personal computer for e-
shopping. In 2000, mobile phone owners in China made up just seven percent of
the population and by 2013 grew to around 90 percent. China is the world’s
largest consumer of mobile phones (International Data Corporation, China
Quarterly Mobile Phone Tracker, February 19, 2014). According to a China Press
and Publication Academy report released in 2015, one-third of Chinese leisure
time is spent on the Internet, primarily mobile phone users. Chinese adults
spend 40 minutes twice a day reading on WeChat—the popular social media site
developed by Tencent, a major e-marketing competitor in China.
Mobile phone addicts get their own street lane in Chinese city of Chongqing
For Q1 2015, mobile shopping grabbed over 60% of the market share,
followed by mobile value-added services, mobile game and mobile advertising
taking a little over 13% of the market share (iResearch, 2015). Unlike in the US,
online shopping in China is not primarily tied to bricks and mortar stores. In the

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US, retail stores have a web presence. In China, digital stores like Alibaba and
JD.com. offer products not necessarily available in physical stores.
ONLINE SHOPPING IN CHINA – BY THE NUMBERS
China Internet Network Information Center, 34th
Statistical Report
 The number of online shoppers in China reached 332 million, rising by
29.62 million over 2013, a growth rate of 9.8% by mid-year 2014.
 The number of mobile shoppers reached 205 million with a semi-annual
growth rate of 42% by mid-year 2014.
 Mobile shopping rose from 28.9% in 2013 to 38.9% by mid-year 2014.
 Mobile payment users increased by 63.4% by mid-year 2014 compared to
2013.
 Mobile payment use rose from 25.1% at the end of 2013 to 38.9% by mid-
year 2014.
 The number of online payment users in China reached 292 million by mid-
year 2014.
 Online payment activity increased by 32.08 million compared to 2013,
representing a semi-annual growth rate of 12.3%.
CINIC REPORT, JULY 14, 2014. The statistical reporting period was for the first six months in 2014,
compared to all of 2013.
Higher prices in China have fueled the e-commerce boom. “Made in
China” does not mean the product originates in China. Chinese consumers pay more
for US brand products in retail stores than US consumers, even though they are
manufactured in China. The Chinese government relies heavily on tax revenue to run
the country. The multiple taxes levied, including value-added, consumption,
business tax, tariff, and related taxes, drive up retail prices for the consumer. An
Apple iPad manufactured in China costs about $499 in the U.S, but the Chinese

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customer will pay the equivalent of $757. One of the few international brands
originating in China is Lenovo, but the purchase cost in China is 10% higher than in
the U.S. (Why “Made in China” Costs More in China, econintersect.com blog,
Waiching Li, August 2011).
However, on the immediate horizon is a ten-year plan to shift from labor-
intensive manufacturing to smart manufacturing, led by Premier Li Keqiang and
outlined in Made in China 2025, released May 2015 by the State Council. New access
to retail and services markets through cross-border e-commerce will drive the
consumption economy and smart industrial development, modeled on Germany and
Japan, will address the decline in manufacturing in China.
A new Silk Road connecting global markets is planned. The National
Development and Reform Commission, Ministry of Foreign Affairs and Ministry of
Commerce, in March 2015, released its action plan Vision and Actions on Jointly
Building Silk Road Economic Belt and 21st-Century Maritime Silk Road. The plan calls
on other countries to join them in building “an infrastructure network connecting all
sub-regions in Asia, and between Asia, Europe and Africa step by step." Notably, the
plan proposes to “jointly advance the construction of cross-border optical cables and
other communications trunk line networks, improve international communications
connectivity, and create an Information Silk Road” (full text:
http://news.xinhuanet.com/english/china/2015-03/28/c_134105858.htm). The plan
is ambitious and there is an urgent need to build a robust and reliable Information
Silk Road to support e-commerce markets. The Chinese State Council also plans to
increase the 4G network to full coverage and triple the broadband speed in major
urban areas to 30 Mbps and to at least 20 Mbps for smaller cities in China within
two years (iResearch, 2015, China Adds 20 Mln 4G Users in May).

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New government liberalization policies will further open up
international trade. The Ministry of Industry and Information Technology
(MIIT) is allowing full foreign ownership for specific e-commerce businesses at
test sites where there is a growing middle class and a strong appetite for
international online shopping: Shanghai, Beijing, Chongqing, Zhejiang, and
Shenzhen. In 2013, the B2C cross-boarder e-commerce platform
kuajingtong.com was allowed to operate in the Free Trade Zone in Shanghai.
Amazon China will take advantage of the free trade zone and develop
warehousing centers in Shanghai. The Shanghai Customs, Shanghai Entry-Exit
Inspection and Quarantine Bureau and State Administration of Foreign Exchange
bring to the cross-border e-shopper guaranteed product authenticity,
competitive pricing, transparent taxes, convenient logistics and customer service.
In 2013, there were 18 million online cross-border shoppers in China and of
those, 78% were mobile phone shoppers. (China Internet Watch, September
2014).
The Chinese government promises to lower taxes for exports to increase
domestic trade and initiate new competitive export tax policies (iResearch,
Chinese Government Announces New E-Commerce Guidelines for Businesses,
2015). Until recently, international companies interested in cross-border e-
commerce faced product payment and delivery issues, and most importantly,
Chinese government restrictions on foreign businesses. New mobile technology
platforms, including third-party payment applications, better delivery logistics
and more distribution centers as well as government economic liberalization
policies have clearly opened the way for exceptional e-commerce growth in
China.

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CHINA’S RISING INCOMES AND MARKET POTENTIAL
e-Commerce growth rides the wave of increasing income levels. As
reported in a McKinsey Report “Meet the 2020 Chinese Customer” (2011), 14 cities
in China are expected to make the list of the top 25 cities worldwide with the
highest GDP growth by 2020. According to the report, the Chinese consumer falls
into three main categories based on income: value, mainstream and affluent. Value
consumers are households with $6,000 to $16,000 disposable incomes. The next tier
is the mainstream consumer household with $16,000 to $34,000 disposable
incomes. They are considered wealthy and represent less than 14 million household
at that income level. For the affluent consumer, the household income is over
$34,000 and represents two percent of the urban population at 4.26 million. The
World Bank Development Research Center of the State Council in China 2030
Building a Modern, Harmonious, and Creative Society (2013) projected annual per
capita income in two decades will be approximately $16,000, tripling the current
levels.
Urbanization is a major driver for a new consumption economy.
According to the National New-Style Urbanization Plan (2014-2020), 60% of the
Chinese population will live in cities by 2020, which will be 100 million more urban
Chinese. By the end of 2014, there were 54.7 percent or 749.16 million permanent
Chinese living in cities, considerably lower than 80% for developed countries’ urban
populations (“New Style Urbanization Plan 2014-2020, Xinhua News Agency, March
16, 2014; ChinaDaily.com, Jan. 20, 2015). The four Tier-1 cities are Beijing, Shanghai,
Guangzhou, and Shenzhen.

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China’s Population Sectors: Households and GDP
Tier 1 4 cities; 16 million households
GDP 1 Trillion RMB/ $163 billion
Tier 2
23 cities; 38 million households
GDP 2 Trillion RMB/$325 billion
Tier 3
229 cities; 75 million households
Tier 4
1,612 cities; 86 million households
Rural
30,000 towns; 75 million households
GDP 4 Trillion RMB/ $650 billion
Source: Nielsen Report. China 2015, A New Era of Consumption
CHINA’S E-COMMERCE LIFESTYLE AND BEHAVIORS
“In the US, e-commerce is just shopping online. In China, e-commerce is a
lifestyle.” This observation by Jack Ma, CEO of Alibaba Group, the top e-commerce
company in China, is right on the mark, especially for urban Chinese with disposable
incomes. Among 3,500 consumers in 27 cities across China surveyed by Accenture (a
marketing consulting company), there were clear indications of a middle class
consumption lifestyle and an interest in higher quality goods. Among the surveyed
urban Chinese consumers, 73 percent go online to shop and close to 50 percent visit
social media sites every day.
Those more likely to make a brand purchase are urban, living in large cities where
there is a higher international brand presence, and young people because they tend
to have higher brand awareness. A majority (80%) of urban Chinese shop online at
least once a month. Finally, the Accenture survey found that urban Chinese are wary
shoppers. At least 75 percent of shoppers compare prices online and offline and

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more than half will go to the physical stores to see the products before buying
online (The Allure and Challenges of China’s Changing Consumer Market, Accenture,
2014). In Tier-1 cities like Shanghai, consumers shop for vacations, cars and high-end
cosmetics, handbags and clothing at a rate more frequent than consumers in Tier-2,
Tier-3 or Tier-4 cities (KGMP, China 360, 2014).
Chinese e-shoppers want the best deals and the best experiences.
Successful blitz sales such as Alibaba’s Singles Day, 11-11, gives the consumer both
the thrill of participating in a sales event with a theme and within a short time
frame, combined with the prospect of getting a good deal on purchases. The e-
shopping experience mimics gaming and taps into the Chinese love of group events.
In fact, marketing ploys like Singles Day give consumers a sense of belonging and
connectivity that underlies the popularity of social media in China. The revenue
generated in one day by this e-marketing ploy in 2013 amounted to RMB35.019
billion worth of transactions. Such high gross merchandise value (GMV) attests to
both the importance of the shopping experience and access to discounts for the
Chinese consumer.
Chinese females represent a significant proportion of e-shoppers. An
estimated 40% of Chinese females manage household expenses and 60% of mobile
Internet users are female. Among female shoppers in 2014, almost one third
(27.3%) of mobile Internet purchases were for clothing, shoes and bags. Cosmetic
products are very popular and placed third among products most often purchased
(iResearch 2014). The largest online discount retailer Vipshop Holdings Limited
commissioned the Economist Intelligence Unit to survey female online consumers in
Asia. The survey results published in 2014 were based on responses from 5,500
women in Greater China, India, Japan, Singapore and South Korea. The results
indicated that Chinese women are brand conscious, not necessarily brand loyal and
price remains the highest consideration when making purchases.

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Mainland Chinese Women Consumers
 62% consider themselves joint bread winners in their family
 91% of urban adult women contribute to household income
 76% have their own bank accounts; 53% have their own credit cards
 69% prefer shopping online to shopping in stores
 74% of all women and 77% of 18-29 year olds buy for themselves most of
the time when shopping online
 63% believe products from abroad are superior
 64% browse for products and services at least once per day
China’s rural population is an untapped e-commerce sector. At least 64%
of rural Chinese used mobile phones to shop online and 43.5% of rural Internet users
visited e-commerce websites multiple times a week in 2015, according e-company
giant Tencent. Three other key players have their sites set on a rural e-market.
Alibaba intends to invest 10 billion yuan to build 1,000 operation centers in county
seats and up to 100,000 service outlets in villages. JD.com Inc. (JingDong) will
establish a county-level center in south China's Guangdong Province to support
shopping online for rural farmers. Suning Commerce Group will develop 10,000
depots covering 25 percent of Chinese rural areas in five years, according Vice
President Sun Weimin (Xinhua news, Jan. 31, 2015).
Types of Purchases Made by Mainland Chinese Women
Cosmetics – 86% Home products & furnishings – 63%
Clothing and accessories – 79% Electronics – 48%
Groceries – 78% Travel and Leisure – 47%
Maternity and children’s products 70% Furniture – 39%
Source: Economist Intelligence Unit Report, 2014

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CHINA’S TRADITIONAL CULTURE AND CONFUCIAN VALUES
Chinese consumers are communal-oriented and social status or face
(mianzi) is highly valued. High net worth Chinese will pay more for global
brands and luxury items as a symbol of their elite social status. The rising middle
class consumers will pay higher prices for import goods, perceived to be better than
domestic goods, to demonstrate to others (outwardly) their place in society
(Warveni Jap, Confucius Face Culture on Chinese Consumer Consumption Values
toward Global Brands, The Journal of International Management Studies, Volume 5,
Number 1, April, 2010).
A brief by Globalization Partners International (2014) summarized Chinese
culture and values based on Geert Hofstede’s book Consequences, Comparing
Values, Behaviors, Institutions, and Organizations Across Nations (Thousand Oaks,
CA: Sage Publications, 2001.) Hofstede identified the following five key behavioral
characteristics of the Chinese:
Chinese Consumer Behaviors Steeped in Values and Tradition
Collectivism Family and social groups versus the
individual
Power Distance Confucian hierarchical authority versus
egalitarianism
Masculinity-Femininity Assertiveness versus nurturing
High-Low Context Symbols and nonverbal cues versus
explicit communication
Uncertainty Avoidance Security versus risk-taking
Consequences, Comparing Values, Behaviors, Institutions, and Organizations Across Nations,
Geert Hofstede, 2001

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Two cultural values underlying e-commerce behaviors in China are Xin
(trustworthiness) and Guanxi (connections and relations). Trust is important for the
Chinese e-shopper and explains in part why just 19 percent of consumers shop at
official brand or manufacturer websites, compared to 41 to 60 percent in Japan, the
United States, and the European Union. Chinese consumers prefer making purchase
decisions after considerable investigation of the product or service.
Chinese consumers are also inclined to yield to the majority because
harmony in person-to-group relations is important (Jap, 2010). Loyalty to family and
social groups explains why social media networking is so prevalent in China.
According to eMarketer (April 2015), China mobile social networking users should
reach 335.9 million with an increase of 20.7% in 2015. Currently, 80.3% of Chinese
access social media sites with 32.5% using mobiles phones for social networking at
least monthly. Social media is an important marketing channel in China for the top e-
commerce players.
Chinese e-consumers are not impulse spenders. According to the McKinsey
Report, 2011 (Meet the 2020 Chinese Customer), 28 percent of people admit to
buying on impulse compared with 49 percent in the United Kingdom. They look for
the best deal, the best recommendation and the best experience. Among 20
countries surveyed by Boston Consulting Group, over 40 percent of Chinese
shoppers indicated they read or posted reviews online, almost twice the rate in the
United States. The primary platform for online reviews in China is the social media
site. The top social media networks in China are Sina Weibo, Qzone, WeChat,
Tencent Weibo and Sohou Weibo (China Internet Watch, 2015).
Understanding the significance of traditional symbols for the Chinese is
absolutely necessary for successful e-marketing. In China, red represents good
fortune and joy. Yellow represents royalty and a higher social status. Green

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represents money. The Chinese websites are dominated by vibrant red and yellow
colors. E-commerce billionaire Jack Ma can be seen wearing a bright green tie and
photographed against a background of green Chinese characters.
A Chinese New Year tradition is send to family and friends gifts of money
placed in a red envelope. Red envelope or hongbao is popular for birthdays,
weddings, and special occasion gift-giving as well. Seizing on this Chinese tradition,
Tencent rolled out a WeChat Red e-Envelope, an extremely successful marketing
scheme poplar with Chinese e-shoppers.
Using mobile payments linked to the Tencent social media application WeChat,
anyone can send or receive an e-red envelope for an array of transactions: send
money to friends, pay bills, hail taxis, pay for parking, buy movie tickets or book
flights. Participants can even designate an amount of money to be distributed to
friends and family, like a lottery, adding a gaming element to giving gifts of money
(China Research Center, 2015). WeChat reported 468 million monthly active users.
Within 10 days of the 2014 Spring Festival, more than 8 million users exchanged
over 40 million red envelopes (China Daily, 2015). Competing with Tecent, Alibaba
launched its own red envelope using its microblogging platform Sina Weibo. For just
one day in February, Alibaba reported 240 million virtual red envelopes, totaling
close to $640 million, were sent through Alipay (Forbes Asia, 2015).

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CHINA’S E-COMMERCE FORECAST
Clearly, e-commerce in China is booming and is likely to keep its lead among
all other countries. The Chinese government is transitioning from a labor intensive
manufacturing economy to a consumption economy. In 2013, China had 302 million
e-consumers. By 2021, that number is expected to jump to over 680 million (Forbes
Business, June 2014).
Key drivers for exceptional growth will continue to be anytime, anywhere access to
cross-border online shopping possible with mobile technologies and third-party
mobile payment platforms; rising per capita incomes and urbanization; government
e-commerce liberalization policies; new rural consumer base; a growing number of
female e-shoppers; and e-marketing strategies drawing on Chinese traditions, values
and communal-oriented shopping behaviors.

China e-commerce whitepaper

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