China’s E-commerce Revolution
Chinese revenues from online sales have hit a record high during the Single’s Day promotions of November 11. This not only reflects social changes in the country but also serves as a driving force behind those in many aspects. These changes are brought on, among others, by a program launched by Alibaba to integrate rural areas into the online economy, which has tangibly contributed to reducing poverty, the positive effects of which have encouraged the government to support internet shopping as well.
Rapid growth of online purchases
International press has been reporting on the huge volume of goods purchased during China’s Single’s Day events, which by now have far exceeded those of “Black Friday” and “Cyber Monday”, initially started in the United States and now popular in Hungary, too. On November 11, 2018, sales of sites belonging to the Alibaba group alone reached over 30 billion USD. The present study examines the causes and effects of the rapidly growing online sales in the People’s Republic of China as well as the various incentive programs by which not only companies but also the Chinese government aim to boost their citizens’ consumption and persuade traders to join the many e-commerce platforms.
In 2017, China’s e-commerce platforms registered sales worth 1 trillion USD, of which Alibaba group member Taobao, the first and still the most popular online shop had the largest turnover. In comparison, online stores in the US realized half as much trade, and while the Chinese experienced 30% growth, US web shops only produced 15% higher sales than in 2016.[i] It is no accident that China, still considered a developing country, has become a global leader in e-commerce. Web shops allow produced goods to be sold without having to maintain a physical store or spend on advertisement, making it much easier to start new businesses. While most online shops were initially managed by urban citizens, by now, China’s underdeveloped rural areas have fast enough internet connections and have also begun to participate in e-commerce. Certain villages, in fact, have been lifted out of poverty by the profits provided for them through the opportunity of online trading. Some municipalities have narrowed down their portfolio by focusing on a single type of product, enjoying an almost monopoly on the primarily Chinese but increasingly international markets of Christmas tree decorations or stage costumes, for instance.
Besides the fact that by shopping online individuals, especially those in rural areas, can obtain goods at lower prices with more variety, these platforms enjoy considerable support on the level of the Chinese government as well. The leadership of the People’s Republic of China explicitly aims to increase the country’s domestic consumption, reacting to structural changes in their economy, as – due to increased domestic wages – China can no longer compete in export production with Asian countries that have cheaper production costs. Although the high savings rate of China’s nearly 1.5 billion population does not allow for similar consumer behavior as observed in the US, the increase in e-commerce has still brought about many positive changes, which can encourage other developing countries to improve their digital economies.
However, several conditions must be met for online trade to have a similarly positive effect on people’s quality of life in the poorer regions of a country. India, for instance, often comes up in this comparison. Several China-specific factors have contributed to the success of the giant companies addressed in the next chapter, such as the extremely high rate of internet coverage and the effectively functioning logistics network, although the latter has been created, in part, by exactly the increase in online sales. Currently 35 thousand express shipping companies operate in China, which together manage more than 100 million packages a day. Service centers, warehouses, and qualified workforce allow Chinese customers to receive their packages in just a few days even when they are shipped from the opposite end of the country. Such a level of logistics coverage, which has been developed thanks to years of investment and a fundamental change in Chinese consumption behavior, is not present in other countries, however hard their governments may try to improve the quality of life of the rural population though e-commerce.[ii] Meaning, that the effects discussed in this paper cannot be applied to other countries without major changes.
Rise of the top players
Alibaba – Taobao
The world-wide known founder of the Alibaba group, Jack Ma began his career as an English teacher only to become the richest man in China. He not only enjoys great popularity but also became a sort of idol – with people building partly humorous shrines as a tribute to Ma, the “god of money”.[iii] Alibaba’s web shop, created at the turn of the millennium and later named Taobao, is currently the 8th most visited website internationally, right after the US Amazon.[iv]
Taobao’s internet platform uses a similar business model as that of eBay, meaning that the products appearing on the website are all sold by individual sellers with shipping being handled by the “shops”, as well. This entails low costs for Taobao but also makes it hard to guarantee the quality of products. Contrarily, Tmall, also operated by Alibaba, directly connects manufacturers and customers, and well-known clothing brands of the West, such as H&M and Zara, operate their own businesses on the website.
Single’ Day, which is now internationally known and “celebrated” by all online actors throughout China, is also linked to the Alibaba group. Before it became associated with online shopping in 2009, the occasion had simply been a day dedicated to single young people, inspired by the four “ones” of the date November 11. After its emergence in the ‘90s, Single’s Day was celebrated by buying gifts for oneself, as a counterweight to Valentine’s Day. Alibaba used this occasion to announce an inter-store sales program and ever since then Single’s day have become synonymous with online shopping deals. The rate of the celebration’s spreading in China demonstrates again the popularity and influence Alibaba enjoys.[v]
Sales on Single’s Day 2018 reached 30.8 billion USD, exceeding the total sales of Black Friday and Cyber Monday in the US. Alibaba’s payment system is used by 870 million people, whose payment patterns were examined by the company this year for the first time to determine the percentage of those choosing biometric identification during payment instead of entering passwords. During more than 60% of the purchases made on November 11, customers finalized their transactions by using fingerprint or facial recognition.[vi] This rate is higher than the international average and reflects the effects of technological changes on society in recent years, namely the fact that online purchases, which may be regarded as of higher risk in other countries, have become part of Chinese people’s daily life, allowing platforms to store large amounts of data so that payments can be made with a single click, making them very convenient for customers.
JD.com, mostly known abroad for its founder having been accused of sexual assault[vii], is China’s third largest e-commerce company – Pinduoduo, a new actor has just recently overtaken it. Liu Qiangdong (Richard Liu) gradually built up the enterprise starting from a little booth selling electronics in 1998 and became the 18th richest person in China. Interestingly, the SARS virus in 2003 brought about the turning point in the company’s life because it was then that Li had to transfer sales to an online platform to reach customers too afraid to leave their homes. Li’s strategy and the characteristic of JD that distinguishes it from other online shops is their zero tolerance of fake products. Unlike Taobao and similarly to Amazon, most of the goods on the site come from JD’s own warehouses rather than being supplied from a third party shops selling on the site.[viii]
Furthermore, JD manages order deliveries through its own logistics company, avoiding the unreliable public postal service and, at the same time, providing a sort of advertisement for the company through the easily recognizable uniform of their delivery staff.[ix] An even more effective way to attract attention however, was the drone delivery program, which is still under development by Amazon in the States but already in use by JD. The program illustrates the significance of innovation in the competition between e-commerce actors as well as the flexibility of the Chinese, thanks to which they are remarkably quick to adapt to the latest tech innovations in their daily life. JD’s drones began to operate in difficult to access rural areas, and by today they have 40 drones carrying out deliveries to 100 villages.[x]
The perception of JD, however, shows a negative trend as scandals concerning the company are linked not only to the chief executive; the company has recently met with criticism regarding the treatment of its employees. Of the over 100,000 workers who delivered the orders worth 23 billion USD placed during Single’s Day in 2018, many students were employed by the company as part of their university internship and, according to their subsequent statements, were forced to work 12 or even 16-hour shifts for less than minimum wage.[xi]
Pinduoduo was created in 2015 in Shanghai, it might be a new player on the scene, less known in the West, it should not be overlooked, however. Its 38-year-old founder Colin Huang became the first self-made billionaire in China, when he raised 1.6 billion USD going public on Nasdaq in the summer of 2018, thereby realizing the fourth largest IPO (initial public offering) of that year in the US.[xii]
With 344 million active users a year, Pinduoduo mobilizes one fourth of China’s population, around 60% of whom come from the country’s less developed cities and rural areas. It is now the country’s second most popular e-commerce platform after Alibaba’s Taobao having overtaken JD.com. The site owes its unique character to group purchases – where customers get better deals on products bought in groups, and app also shows what others are buying, letting the costumers join in on other ‘shopping squads’ as well. The fun factor of the app makes it particularly addictive and creating groups is also worth the wait for customers as in underdeveloped regions even the smallest discounts count. Pinduoduo has received criticism for providing a platform that sells low quality or even fake products, nevertheless those of the lesser developed parts of the country can still access a wider variety of products through the site.[xiii]
Corporate and government strategies to promote consumption
Naturally, one of the first initiatives are linked to the largest and the first web shop, i.e. the giant Alibaba, which officially launched its program called Taobao villages in 2014[xiv], although the first such village had already been created in 2009. Dongfeng (Jiangsu province), was established as a result of the villagers own initiative, with more than a thousand households joining the digital economy and starting to sell the furniture manufactured locally on the internet. AliResearch, Alibaba’s official research institute defines Taobao villages as follows:
- clusters of e-traders within an administrative unit, who have begun to sell their products (primarily on Taobao’s platform) at their own initiative;
- where annual total sales reach 10 million RMB (1.6 million USD);
- and where at least 10% of households participate in e-commerce or locals operate at least a hundred online shops.[xv]
By 2014, not only Taobao villages but also Taobao towns emerged. According to Alibaba’s own research, by 2015 over 200,000 online shops operated in 780 Taobao villages and 71 Taobao towns, meaning that the number of e-commerce players rose by 268%, and by 2017 there were 2100 Taobao villages and 240 Taobao towns.[xvi] The most commonly sold goods are clothing, shoes, and furniture, although some towns have developed their own very specific product portfolios.[xvii]
Surreal photos of the all-year-long “Christmas” atmosphere in Yiwu, which manufactures, among other things, most of the Christmas decorations sold globally, have been circulating in Western media for some years.[xviii]. The town, located some 300 km-s from Shanghai is the largest Taobao cluster consisting of 113 villages. On its own website, the town values e-trade turnover at 140 billion RMB with estimates saying that e-commerce has directly led to the creation of as many as 250 thousand jobs.[xix]
Taobao villages represent an interesting combination of adapting to local circumstances, initiatives by rural populations, and the supporting attitude of regional governments. While some municipalities have transformed their existing industries to produce goods they could sell online to both domestic and international markets; others have improved their infrastructurally poor villages by laying down optical cables to provide high-speed internet or by building high quality roads to make shipping easier, this way being able to reap the benefits of the digital economy.[xx]
Trainings in e-commerce and cloth manufacturing were organized in the village of Daiji (Shandong province) as part of a government campaign to end poverty, while local business owners are also supported by low-interest loans. According to Alibaba’s research, 6300 people were lifted out of poverty in less than four years thanks to e-commerce.[xxi]
In November 2016, the State Council Office on Poverty Alleviation, together with 16 other ministries, published their guidelines on the expansion of e-commerce in rural areas. According to the document, impoverished rural counties should quadruple their e-commerce sales by 2020. The program is a part of President Xi Jinping’s “Chinese Dream” initiative, aimed at creating a “moderately prosperous society” by 2020.[xxii]
So, the characteristic ability of online sales and purchases to somewhat alleviate social inequalities, also mentioned in connection with the Taobao villages and Pinduoduo, have caught the attention of central and local governments as well, with the latter trying to encourage producers to migrate to internet platforms, providing connection to more developed regions. Chinese statistics speak of lifting as many as 60 million people out of poverty, while the positive effects of e-commerce in this area have also attracted the attention of the World Bank, which, along with Alibaba, have been looking into the opportunity since 2016 to adapt the initiative to other countries.[xxiii]
The future of e-commerce
The dramatic development of e-commerce may slow down just as the growth of China’s economy did. There are more and more pessimist voices regarding the increase of the Chinese middle class’s (about 400 million people) consumption, and the trade war with the US can also endanger traders selling overseas.[xxiv]
The Lipstick Effect, as economists call it, a sign of the population losing trust in the economy which leads to decreasing consumption, has also emerged in China. When customers feel that their financial situation is uncertain, their purchases shift from higher-value products to cheaper items – they buy cosmetics, for instance, instead of TVs.[xxv]
Spectacular as they might be, the Single’s Day sales by Alibaba worth over 30 billion USD show, in fact, a lesser increase than the comparison of the revenues in the years 2016 and 2017. While the value of sold goods rose by 27% in 2018 compared to 2017, 2017 was better by 39% than 2016.[xxvi]
China’s e-commerce, however, not only supplies domestic consumers but also produces an increasingly high turnover abroad. Since 2015, Chinese leadership has established several cross-border e-commerce zones throughout the country to promote import besides export. One of these zones is, of course, the birthplace of Alibaba, Hangzhou city, where the rate of external trade jumped from 100 million to 60 billion RMB between 2014 and 2017, accounting for a 500-time increase of the city’s industry. These zones, connected to Europe by railways, play a central role in the “Belt and Road Initiative” and enjoy high levels of government support.[xxvii]
Furthermore, the negative effects of the trade war with the US are also subject to dispute. Yiwu, the previously mentioned town responsible for 70% of Christmas decoration exports does not seem to have been adversely effected by the 10% tariff imposed on Christmas lights; as the town received the usual amount of orders in 2018, too. In the case of certain products, China appears to have such a competitive edge over other countries in the region that American customers will most likely continue buying their Christmas decorations from China and end up paying for the tariffs through the increased prices themselves.[xxviii]
We can conclude that, although China faces challenges regarding their digital economy, the country has obviously become an e-commerce power and is likely to remain unmatched in this field in the near future due to factors such as the increasing consumption of the rural population, the improving infrastructure network connecting China to Europe under the “Belt and Road Initiative”, and finally the development implemented over the recent years as well the changes in people’s consumer behavior.
author: Fanni Maráczi
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Caixin: Jack Ma Mania Borders on Religious Fervor In: Sixth Tone, 12 Nov. 2018. http://www.sixthtone.com/news/1003198/jack-ma-mania-borders-on-religious-fervor
China’s Christmas Village Isn’t Worried About Trump’s Trade War In: Bloomberg, 21 Nov. 2018.
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Economic pressure won’t curb Chinese consumers’ desire for quality: analysts
In: Global Times, 27 Aug. 2018.
E-commerce in China spreads its cross-border wings, becoming main growth engine for foreign trade In: Strait Times, 6 Aug. 2018.
Fan, Jiayang: How E-Commerce is Transforming Rural China In: The New Yorker, 23 Jul. 2018.
Freedman, Josh: Once poverty-stricken, China’s “Taobao villages” have found a lifeline making trinkets for the internet In: Quartz, 12 Feb. 2017. https://qz.com/899922/once-poverty-stricken-chinas-taobao-villages-have-found-a-lifeline-making-trinkets-for-the-internet/
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[i] Tong, Frank: Online retail sales in China soar past $1 trillion in 2017 In: Digital Commerce 360
[ii] Cools, Luisa: Why China’s E-commerce Model May Not Work Elsewhere In: Sixth
[iii] Jack Ma Mania Borders on Religious Fervor In: Sixth Tone, 12 Nov. 2018.
[v] ZENG Yuli: Why I’m Hooked on ‘Double Eleven’ Deals In: Sixth Tone, 11 Nov. 2018.
[vi] Liao, Rita: 11/11 shows biometrics are the norm for payments in China In: Tech Crunch
[vii] Qian, Zhecheng: Amid Rape Allegations, US Law Firms Plan Suit Against JD.com In: Sixthtone, 5 Sept. 2018.
[viii] Fan, Jiayang: How E-Commerce is Transforming Rural China In: The New Yorker.
[x] Zhang Wei: How e-commerce with drone delivery is taking flight in China In: The Economist, 9 Jun. 2018.
[xi] HANCOCK, Tom: Illegal student labour fuels JD.com ‘Singles Day’ sale In: Financial Times, 21 Nov. 2018.
[xii] Xue Yujie: The Shopping App That Unveiled China’s Social Divisions
[xiii] Xue Yujie: The Shopping App That Unveiled China’s Social Divisions
[xiv] Hsu, Jenny W.: Rural Taobao to Expand to One Thousand Counties
[xv] Dongfeng Village in Shaji Town, Jiangsu Province, where more than 1,000 households joined the digital economy
[xvi] Yiwu became the largest “Taobao village” cluster in China In: Linkyiwu
[xvii] Dongfeng Village in Shaji Town, Jiangsu Province, where more than 1,000 households joined the digital economy
[xviii] Wainwright, Oliver Santa’s real workshop: the town in China that makes the world’s Christmas decorations
[xix] Yiwu became the largest “Taobao village” cluster in China In: Linkyiwu
[xx] Freedman, Josh: Once poverty-stricken, China’s “Taobao villages” have found a lifeline making trinkets for the internet
[xxiii] Hofman, Bert: The Taobao Villages as an Instrument for Poverty Reduction and Shared Prosperity
[xxiv] Economic pressure won’t curb Chinese consumers’ desire for quality: analysts
In: Global Times
[xxv] Zeng Yuli: Why I’m Hooked on ‘Double Eleven’ Deals
[xxvi] Kaplan, Marcia: Alibaba’s 2018 Singles Day: Record Sales, Slower Growth In: PracticalEcommerce
[xxvii] E-commerce in China spreads its cross-border wings, becoming main growth engine for foreign trade In: Strait Times, 6 Aug. 2018.
[xxviii] China’s Christmas Village Isn’t Worried About Trump’s Trade War In: Bloomberg, 21 Nov. 2018.