As E-Commerce Explodes, Who Will Prosper?
A new report on the explosion of e-commerce in China seems like a good opportunity to take a broader look at the sector and its longer term potential, including which players are likely to emerge as the big winners over the longer term. The latest figures indicate the potential of e-commerce in China is huge, meaning we could ultimately see 2 or 3 major players succeed in the market. But that also means we’re likely to see at least 3 or 4 casualties in the current battle for supremacy, since the field of major, well-funded contenders current numbers around 6 or 7.
Let’s start by looking at the new report from Bain & Co, which says China will pass the US to become the world’s biggest e-commerce market this year. (English article) We need to put this in a bit of perspective, since the population of the US is only about a quarter of that of China. So that means the average Chinese online shopper may only be spending about a quarter of what an equivalent US consumer is. Still, average Chinese wages are well below a quarter of those in the US, meaning Chinese are spending a bigger portion of their salaries online.
All that is quite remarkable for a country where most people didn’t even own computers a decade ago, and e-commerce probably accounted for a tiny fraction of total retail sales just 5 years ago. The Bain report says that e-commerce buying grew by an average rate of 71 percent each year between 2009 and 2012, and is likely to hit 3.3 trillion yuan ($540 billion) by 2015. It further states that e-commerce could account for half of Chinese retail activity in the next decade.
Most of that may sound like just numbers to the average reader, but anyone living in China can see signs of the e-commerce explosion all around. It’s nearly impossible to walk down a street in Shanghai these days without seeing numerous delivery vehicles zipping by, from bicycles to motorcycles operated by small local firms to cars and vans operated by big names like UPS (NYSE: UPS).
The guard station at my building is always cluttered with packages waiting to be claimed by residents who ordered the goods online, and the university where I teach has numerous pick-up points where couriers wait patiently for students to come and get similar packages. The rapid spread of Internet access and smartphones will only boost the trend, making e-commerce accessible to more Chinese who can order goods online both at home and outside.
All that brings us to the bigger question I initially raised, namely who will be the big beneficiaries over the long term. Niche firms like discount retailer Vipshop (NYSE: VIPS) and clothing seller Vancl could ultimately do well if they focus on their core areas and develop loyal customer bases. As I’ve said above, I do think the market could support 2-3 bigger players selling general merchandise, even as a bigger field of names including Alibaba, Jingdong, Suning (Shenzhen: 002024), Walmart’s (NYSE: WMT) Yihaodian, Amazon (Nasdaq: AMZN) and Tencent (HKEx: 700).
If I had to bet on who would succeed over the longer term, I would put my money on Alibaba, Amazon and Tencent for different reasons. Alibaba is the strongest prospect due to its current position as market leader and long history in e-commerce. Amazon brings its global dominance and experience as its major strengths. Tencent may seem like an unlikely winner, though it has vast financial resources and a strong record of using its strength in social networking services (SNS) to become a leader in other areas.
Only time will ultimately tell who wins the battle for this huge market, and it could still be another 4 or 5 years before some of the major players finally decide to either quit or scale back their operations. In the meantime, we can expect more price wars as the market continues to grow at a strong clip and the big e-commerce firms compete for online buyers.
Bottom line: E-commerce is likely to dominate the Chinese retail landscape in the next decade, with Alibaba, Amazon and Tencent as the most likely big winners in the space.
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