China’s future economic growth might be based on e-tail

China’s future economic growth might be based on e-tail

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An actual study by McKinsey Global Institute gives further facts and figures on China’s e-tail revolution and the authors believe that this will be the future engine of economic growth for the Asian nation. Other sources see Cloud Computing – the China Ministry of Science and Technology estimates that Chinese companies generated in this branch of industry a growth rate of 65 %, and the Cloud business volume in 2010 was around USD 2.6 billion, in 2012 its market share accounts probably beyond 8 % – as a chance to enhance the Chinese web-community

Alone looking at the impressive figures, it becomes obvious that e-tail is an engine for growth. The online population has reached 130 million who own residential broadband accounts (30 % penetration only), market observer Gartner estimates that 2012 there were close to 400 million Chinese using the web (including in internet cafés or sharing sites with friends). There is also a fast spread of smart phones and those are with web-based apps to feed the growing need for fast mobile processing (buys, flight and other tickets and most of all payment traffic). The volume of mobile payments in China supersedes already the volume of all industrialised countries together.

Table 1 evidences the penetration of mobile phones and payments

table_1

In 2012 e-tailing produced sales of more than USD 190 billion (other sources predict up to USD 210 billion), this means 5 to 6 % of the total Chinese retail volume, in the U.S. the share is around 6 %. In 2011 the sales figure was USD 120 billion (CNY 774 billion) and was surpassing sales in Japan (USD 107 billion), Great Britain (USD56 billion) and Germany (USD 32 billion). In China the growth rate on an annual basis is some 60 %. The U.S.A. was still the largest e-tail market in 2011.

Table 2 shows the e-tail growth rates in selected countries

table_2 

Since 2003 China’s e-tailing industry compounded an annual growth of 120 %. There are more than six million e-merchants listed products on Taobao (largest marketplace operator, followed by Tmall and Palpal). Singles Day 2012 generated USD 4 billion in online sales, surpassing Cyber Monday in the U.S. 

The estimates are that Chinese online sales will reach USD 650 billion by 2020 and might add 4 to 7 % to China’s private consumption. In Tier 4 cities, the average online shopper spends 27 % of its disposable income through e-tailing. The e-tailing could also boost labour productivity in China’s retail sector by 14 %.

Table 3 gives a glimpse on e-tail spending in different Tier Chinese cities

table_3 

 

A spending analysis

The McKinsey Global Institute has analysed the spending pattern across 266 cities in China and it suggests that e-tailing has a strong incremental effect on private consumption, particularly in China’s medium size and small cities, which generally lack compelling brick and mortar retail offerings. As consumers gain better access to a broader set of products, they are spending more. The authors of the study, Richard Dobbs, Yougang Chen, Gordon Orr, James Manyika, Michael Chui and Elsie Chang conclude that unlocking demand in currently underserved regions accelerates China’s policy goal of increasing private consumption.

 

Table 4 gives you details on what Chinese consumers are spending in e-tailing

table_4 

As TextileFuture indicated before, Chinese retail is still predominantly regional and it is difficult to scale up traditional store networks across such a large and diverse developing country. The emergence of large national chains has been a milestone in the retail development of most countries, but Chinese retail is coming of age during an era of profound digital disruption.

The possible resulting scenarios

Taking this given facts, there are resulting two different scenarios for the future evolution. China could develop a balanced mix of physical and digital retail, with national brick and mortar chains eventually dominating some product categories and online sales others. But given the extraordinary growth of e-tailing, Chinese retail might mature along very different lines, and in this respect the alternative scenario could unleash a transformative “leapfrog” effect. China could forgo the national expansion of physical stores commonly seen in Western nations and move directly to a more digital retail environment. Such a shift would not only help to boost efficiency in the overall retail sector, but could have broad implications for China’s urban development. In a more digital world, emerging Chinese cities would need less space for physical storefronts – and civic might not revolve around shopping districts and malls in the traditional sense. Warehouse space, trucking routes, and other logistics infrastructure would have to be priorities for smaller cities to fully participate in this internet economy.

Other conclusions

E-tailing is already beginning to generate broad ripple effects. First and foremost, it has provided a powerful launching paid for China’s next generation entrepreneurs and SMEs, small to medium sized companies. These are able to sell directly in the e-tailing marketplaces where economies of scale matter less than in traditional manufacturing and distribution. Strong growth in e-tailing may lower demand in the commercial real estate sector, but it will also create tangible market incentives for innovation in technology, another policy priority in China.

Table 5 presents the facts that Chinese marketplaces dominate e-tailing

table_5 

The authors conclude that all stakeholders, government and private sector should recognisethe strategic importance of this opportunity. E-tailing is of course only one of many drivers that will contribute to China’s new growth model, but it assumes larger significance as a new source of comparative advantage in the world. If Chinese e-tailing successfully achieves a “leapfrog effect” driving rapid transformation in consumption, innovation, logistics and productivity, it will serve as an important case study for other emerging economies in how harness disruptive change as a catalyst for growth.

Further details on Chinese e-tail

A deeper analysis of the 2011 figures show, Large B2C (business to consumer) sites are the clear leaders in other countries, but not in China, where nearly 90 % of the industry is marketplace based (see Table 2), in the U.S. this bracket has only a share between  23 to 24 %. With few major physical retailers developing a successful multichannel approach, marketplace operators have consolidated a huge market share in China and they became the effective channel for a significant base of small manufacturers and wholesalers eager to sell directly to consumers.

Table 6 presents the major differences between the Chinese and US e-tail markets

table_6 

Also more than 70 % of the Chinese market is C2C (consumer to consumer), a share that is in the single digits in most other countries but it underlines the influence of the SMEs in driving the industry’s growth.

Of course, we agree that the industry is still in the initial building phases and high growth is being achieved with relatively low investment of two to four percent of revenue on an annual basis and only the prevalence of C2C and marketplace transactions has made it possible.

It has to be added that the overall –tailing ecosystem is profitable at around eight to ten percent earnings (EBITDA) and marketplace based players represent the more profitable segment.

Individual e-merchants selling through a marketplace do have to face also challenges such as tapping into the huge aggregated already established traffic flow that these marketplaces have already built up (Taobao has six million registered sellers on its central website generating hundreds of millions of product listings), however, e-merchants are able to fill micro and local pockets of demand while staying price competitive due to their low overheads. It has to be additionally stated that independent e-merchants are losing money in an attempt to compete solely on price, hence they need to invest wisely to build and strengthen their unique value proposition and to improve productivity.

The different players

The marketplace operators connect sellers with certified providers of services such as warehousing and shipping. Marketplace providers generate revenue through online advertising and in some cases by charging sellers transaction fees. For marketplace operators the challenges are quality and safety assurance, fraud detection and prevention. The Chinese logistic system – TextileFuture has reported on their situation before – is far from being efficient. There is a need for investment by developing strong systems to centralise back-end and administrative tasks and to keep in line with technological development.

Service providers, holistic supply-chain and information management will be the major growth areas. The field for competitive marketing services is open. IT, warehousing and integrated service providers will enter. Already emerging are online advertising, payment and delivery services, the latter are operating in a rather labour intensive way, but this might change over time.

The Chinese government has not made a great deal of interventions, but in the future it could facilitate continued growth in e-tailing and encourage the attendant effects on overall consumption by focusing expanding broadband and 3G+ infrastructure and big data capabilities, facilitating R&D geared to technology innovation, and by addressing the looming skills shortage. Public-private partnership might be the answer for investing to further improve infrastructure. The government has announced to invest CNY one billion in the next five years to enhance the technological infrastructure to allow also Cloud Computing development. The first pilot centres are located in Beijinjg (the government wants to use this tool also for official purposes such as citizen registration, etc.), Shanghai, Shenzhen, Hangzhou and Wuxi. As mentioned before, e-tailing will pose new issues for cities in view to building storefronts and planning for the e-tail community (warehouse space, trucking routes and other logistics) and residential architecture might have to be adapted to accommodate package delivery as a facet of daily life.

TextileFuture will continue to follow the Chinese e-tail development and of course with a focus on textile relevant aspects.

 

www.mckinsey.com/mgi


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