Finance & Investment

If there is any doubt that China's e-commerce sector is alive and well, one needs to look no further than the Chinese website www.meituan.com. Recently, on Meituan, over 50,000 brand name condoms sold out within hours of going on sale. The condoms were sold for a price of one yuan (15 cents) each, reduced to a third of their normal market price. While few predicted that such an offering would be attractive, the success of this, as well as the online sale of other similar branded goods, reflects the continuing surge in Chinese e-commerce activity. Consumers are moving from consumption to community building, creating networks of purchasers with significant decision power. For example, following the sale of the condoms, activity on related chat boards flourished, with many successful purchasers successful re-selling their prized plastics at a premium. While Meituan continues to make waves - being active for only 4 months and accumulating over 200,000 registered users during that time - the collective growth of similar e-commerce operations is mind boggling. In the first 6 months of 2010, over 33 million Chinese citizens joined the online shopping bandwagon, bringing the total number of regular E-Commerce shoppers in China to just over 142 million. These figures indicate that 1 out of every 3 Chinese Internet users, or one out of 10 Chinese consumers, now purchase regularly online. While the sheer volume of users is exciting, what remains intimidating  for many international operators is the issue of access. With China's strict import rules, many international companies face barriers that prevent them from efficiently providing Chinese customers with product. While these barriers are slowly dissolving, they have enabled domestic producers to entrench themselves within the Chinese e-commerce market, create a domestic competitive advantage that seems sustainable. Yet, while few have questioned the sustainability of Chinese e-commerce operations, questions continue to swirl regarding the ultimate size of the Chinese e-commerce market. Will China see a plateau in the number of regular e-commerce users? If so, when will this plateau materialize? Finally, if China hopes to sustain the exponential growth in e-commerce and mobile web technology, what factors must it address to ensure that domestic operators maintain a competitive advantage?

While all eyes continue to fixate on the future, a quick review of  China's e-commerce history reveals staggering results. Chinese online retail sales increased 117 percent (year over year) between 2007 and 2009. Chinese e-commerce sales are predicted to each 450 billion yuan ($66.45 billion) this year, a figure that will rise as the internet becomes a network driven by applications and mass participation. Today, Chinese consumers buy everyday articles as well as luxury items online, including cameras, laptops, and diamonds. Interestingly, a number of Chinese automakers have recently announced plans to sell vehicles on line, initiating a trend that may potentially change the way consumers evaluate and purchase automobiles globally. For many Chinese consumers, online shopping has brought convenient access to a product assortment that has been unparalleled historically. Online shopping has allowed Chinese consumers to develop buying groups to evaluate products, united consumers with similar interest, while encourage price and product attribute competition. Historically, technological limitations, specifically the lack of secure online payment systems, threatened the viability of the Chinese e-commerce industry as a whole. Fortunately, over the last 5 years, technological development has closed many of these gaps, providing Chinese consumers with the confidence needed to purchase online. In fact, during the spring of 2009, an estimated 128 million people used online payment systems, while 122 million Chinese citizens used online banking services.

In addition to the Chinese e-commerce craze, more and more Chinese consumers continue to support mobile web applications. Currently, nearly 2/3 of all Chinese internet users have mobile internet. With the popularity and affordability of mobile devices increasing, and third-generation network infrastructure being distributed across all Chinese regions, Chinese mobile use has skyrocketed. In June of 2010, over 277 million people accessed the Internet via mobile internet. This number represents more than 65 percent of China's 420 million Internet users. Over the last 6 months, the number of mobile internet users has increased 18 percent. With this growth, it is hard to believe that mobile phones will not replace personal computers as the primary internet access device. Yes, a huge upside exists within this market, as only 11 percent of Chinese users access the Internet using their mobile phones. Still, this figure will rise as companies continue to invest in Chinese telecommunication products.

With tremendous upside in both Chinese e-commerce and mobile internet, opportunities exist for both domestic and international vendors. As the internet becomes focused on mass communication and communitization, demand for applications will continue to increase. Currently, the most frequently requested mobile Internet applications in China include instant messaging, search and music, with penetration rates of 61 percent, 48 percent and 45 percent respectively. Internet literature has become the fastest growing application of the mobile Internet, and over 188 million Chinese users purchased electronic publications in the first 6 months of this year. This increase is due primarily to an increase in the number of online works, as well as an increase in the number of e-readers available. Still, while it appears that China has embraced the digital craze, China;s e-commerce and digital markets still have tremendous upside. China's Internet penetration rate in June was 31 percent, a figure that lagged significantly behind many developed countries with stronger infrastructure. Currently, over 75% of all individuals in the United States and Japan use the internet daily. With so much upside, it would seem irrational for both domestic and international telecommunications vendors to hesitate investing in China. To succeed, interested businesses must develop critical partnerships and business relationships that will enable them to access China's huge population.

Photo Credits: Dan Chung