Academic journal article Asia - Pacific Issues

The Future of E-Commerce in China

Academic journal article Asia - Pacific Issues

The Future of E-Commerce in China

Article excerpt

The global e-commerce industry has high expectations for China as a future market. This is not mere wishful thinking. Within China there is intense pressure for improvement in productivity and for industrial upgrading, which has in turn generated a growing demand for solutions from information and communication technologies. Furthermore, China has what is likely the world's largest untapped pool of information and communication technology skills, surpassing India and the United States. The experience of the United States and the Nordic countries has shown that a strong base of domestic skill and knowledge bodes well for rapid market growth and may provide a springboard for the development of reliable, innovative suppliers. One of the more impressive forecasts is that the number of Internet users in China is expected to exceed 17 million by the end of 2000. Finally, both the central and regional Chinese governments are strongly committed to providing the incentives and public goods needed to support e-commerce development.

However, despite these encouraging features, e-commerce in China has so far made little progress with regard to either market size or scope. Most e-commerce activities remain focused on business-tocustomer (B2C) transactions, but there is very little business-to-business (B2B) activity. This contrasts sharply with the global market, where the number of B2B transactions has surpassed B2C transactions and is growing by leaps and bounds.

The narrow size and scope of the Chinese market is apparent from a new e-commerce market survey, the first of its kind, conducted by the Ministry of Information Industry and focused on B2C online shopping and sales. The survey found that sales in 2000 for the first quarter alone surpassed total 1999 sales. However, this rapid growth is occurring at a very low absolute level: the survey predicts total e-commerce sales this year will reach only RMB 350 million (US$42.27 million), which is a meager figure given the potentially huge market China offers.

The survey also documents other fundamental weaknesses. In most Chinese e-commerce companies, small sales must sustain over-extended product portfolios, and this lack of specialization helps explain why these companies are engaged in profitless growth. Equally important, the survey found that most of China's e-commerce vendors cannot provide the benefits that customers in other countries have learned to expect, such as reduced prices that are usually lower than those found in conventional stores; superior service, including 24-hour, seven-day-perweek hours as well as reliable delivery systems; and a better selection of merchandise, often accompanied by a no-risk return policy.

Possible Explanations

What explains these weaknesses in China's e-commerce industry? Why are sales still small, and why is growth locked into B2C transactions? To answer these questions, four interrelated issues need to be explored. First, who are the founders and the investors in this industry, and what factors in their profile have an effect on profitability? How does this affect the design and implementation of business plans? Second, what peculiar features of industry organization and firm behavior contribute to the lagging B2B market? Third, what bottlenecks are constraining the growth of China's B2B e-commerce linkages, and what are their root causes in terms of markets and institutions? Finally, what changes must be made in these markets and institutions in order to break the current impasse and allow for long-term expansion of e-commerce in China?

Investors and Opportunities

Most Chinese firms do not fully grasp the complexity and dynamics of e-commerce or what they must do to compete within it. This is hardly surprising given the industry's short history in China. Furthermore, company founders who have an information technology background typically have little understanding of the actual nuts and bolts of manufacturing or the demanding requirements of supply-chain management. …

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