China's Online Revolution

In the words of Jack Ma, the billionaire founder of Alibaba, now the largest e-commerce company in the world, “E-commerce in the West is the dessert, in China, it’s become the main course.”

China’s digital development will follow a different trajectory to the West. The fast growth of mobile technology and its applications are changing the tools used as platforms to reach investors and consumers and, more broadly, is driving the economic shift from investment to consumption.

China, the world’s second largest “e-tail” market estimates revenues reached US$210 billion in 2012, after growing at a 120 per cent compound annual growth rate since 2003. It is expected to show 15 to 20 per cent annual growth rates (before inflation), and to notch up between US$420 billion and US$650 billion in sales by 2020. China’s internet users currently number some 564 million people, almost as many as the USA and Europe combined.

With 75 per cent of these users accessing the internet on mobile technology, and currently over 1 billion phone users in the country, China’s online revolution will reshape how international and domestic companies engage with the Chinese consumer.

Online usage strong and growing

With a current penetration rate of approximately 42.1 per cent of the population, China accounts for one fifth of the world’s internet users. As smartphones and tablets make connecting to online networks easier for people in China, we will see the size of the internet population reach roughly 800 million users by 2015.

In comparison to the West, 90 per cent of China’s electronic retailing occurs on digital marketplaces such as PaiPai, Tmall and Taobao (think eBay or Amazon Marketplace) as opposed to directly between consumers and retailers.

The lower barriers to entry, well-developed infrastructure and fewer expenses associated with operating online has seen margins reach 8 to 10 per cent, slightly higher than traditional bricks and mortar retailers.

Furthermore, the top five physical retailers in China hold less than 20 per cent of the market, much lower than the 24-60 per cent market share held in comparable categories in the United States. This is due to the ultra competitive nature of a marketplace well able to exploit the high costs and inefficiencies faced by brick and mortar stores.

In addition, online marketplaces are generating roughly 40 cents more consumption for every 60 cents spent in physical stores. Consumers outside the country’s ‘first-tier’ cities tend to spend a greater portion of their disposable income than their first tier city counterparts. So, with prices on average 6-16 per cent lower online than offline, it is a much more affordable option for these consumers.

Internet sector boosted

In the West there is a lot of negative commentary surrounding internet in China, however, there is a huge amount of effort by the Chinese government to ensure that the internet industry is built so that it not only serves national goals but also commercial ones.

Currently, the internet sector is one of the fastest growing sectors in the Chinese economy. The microblogging industry in China has the biggest impact on everyday life and is the most effective platform for spreading news and views amongst Chinese people. A staggering 80 per cent of China’s internet users are aged between 10 and 40 and 62 per cent of mobile users are younger than 30 years of age.

China has over 600 million users of social networks, a higher portion of internet users than their American counterparts. Furthermore, Chinese Sina Weibo users (similar to Twitter), spend 35 per cent more time on the internet than their tweeting counterparts in the USA.

Sina Weibo is currently valued at around US$3.3 billion and is a very important e-commerce platform. Over 50 per cent of Weibo users searched e-commerce sites after noticing information on Weibo.

China has 242 million online shoppers, six times that of the United Kingdom. The average monthly value of mobile transactions in China is US$800 million, which equates to US$300, every second, and 59 per cent of smartphones have used their phones to shop online.

The fastest growing online activities in China are online banking and payments, group buying, online shopping and weibo, or microblogging, which are growing at 32 per cent, 29 per cent, 25 per cent and 24 per cent, year-on-year, respectively.

By 2014, e-commerce is expected to represent 7.4 per cent of China’s total retail market. Currently, China’s top three e-commerce sites are Tmall, 360Buy and Suning, the market is made up of a few big players with the top 10 sites accounting for more than 65 per cent of the market.

Room for innovators

China’s e-commerce entrepreneurs and innovators are revolutionising the breadth and depth of China’s online market. Tencent, China’s largest publicly listed internet company, was named the 8th most innovative company in China this year. Its mobile messaging app, WeChat (likened to Whatsapp) has over 300 million users.

Professional social networks are also becoming increasingly popular in China, with the number of people using these social professional networks increasing by 250 per cent in 2012 to 70 million users. Currently, the most popular professional network in China is Tianji, currently with 12.3 million registered users and interestingly, the well-known LinkedIn ranks only 7th in China with 2.8 million registered users.

China’s leading internet television company, Youku Tudou (equivalent of YouTube) has 310 million unique visitors each week and generates 1.6 billion hours of video each month.

Threat to banking

The rapid emergence of the internet industry in China allows for a broad range of online financial services, which pose a severe threat to the traditional banking and finance sectors. Emerging third party payment systems, peer-to-peer lending and microfinance services have the potential to eat into the role of the traditional established financial sector.

For example, the world’s largest e-commerce company, Alibaba, has a microcredit company that was founded in June 2010, which has lent over RMB12 billion to over 250,000 clients in the first quarter of 2013 alone. In addition, the non-performing loan ratio was much lower than that of similar loans made by financial institutions.

Further, in August 2012, Alibaba chairman Jack Ma, Ping An Insurance Group Chairman, Ma Mingzhe and Ma Huateng, the chairman of Tencent, set up an online insurance company which sells its products on the online marketplace, Taobao.

These new online insurance policies and products are a big threat to the sector’s traditional operators. In the first three days of sale, over RMB101 million was raked in and over US$815,000 of insurance products are sold on Taobao every day.

Even the mutual funds industry is being heavily influenced by the online revolution. With mutual funds companies being allowed to sell their products online, nearly 30 of them have joined the new funds payment process channel established by Alipay, China’s leading electronic payment platform. From July this year, investors were able to buy into funds at alipay.taobao.com.

Earlier this year on June 13, Alipay, Alibaba’s third party online payment services, launched a service that allows users to invest money into a market fund managed by Tianhong Asset Management. Just 17 days later, over 2.5million users had transferred RMB5.7 billion into the fund, now the biggest (in terms of number of clients) in China.

Alibaba’s success in China’s e-commerce and now financial services space is a huge threat to traditional financial institutions. The firm uses market transaction information to characterise and segment its users to promote financial services that they may be interested in, based on their profile. This is revolutionising the way financial institutions attract and retain clients.

The new revolution

Internet finance is reshaping the banking and financial industry as we know it in the West and creating a new system in China. What makes Alibaba so financially strong, is that funds transferred for the purchase of goods must stay with the company for 7 to 10 days, providing a constant revenue stream and pool of capital that can be used in the financial markets.

With rapid changes in the habits of customers in China, traditional lenders and insurers have no choice but to adapt to these changes or lose market influence. China Merchants Bank have offered integrated banking services on WeChat (messaging service similar to Whatsapp), soon after, both the China CITIC Bank and China Minsheng Banking Corp followed suit.

Lessons to be learned

The Australian retail and financial market needs to be aware of these changes, innovations and developments, especially as China (and other emerging countries) expands internationally, leveraging their direct access to China’s OEM factories and workshops.

With such developments affecting the traditional means of banking and as a catalyst for innovation, traditional commercial banks have moved online to protect their market share and business. For example, China Construction Bank’s e-commerce transactions have broken the RMB3.5 billion (US$570 million) mark.

To keep up with the changing market landscape both here and overseas, Western Banks and Financial Institutions must incorporate internet innovation into their China strategies. This will include having to rethink online strategies and sales growth in online portals. A review of Alibaba’s strategy and rapid development would be a good place to start.