E-commerce helps Western companies gain a toehold in China's vast, untapped domestic market

Though it is relatively new in terms of size and spread, e-commerce has no peers in China. But its real strength, as many foreign companies and brands are discovering now, is its ability to be a matchmaker in the vast and untapped Chinese domestic market.

With revenues in excess of $210 billion (158 billion euros) last year and a steadily growing customer base of more than 500 million, the e-commerce industry in China is fast catching the fancy of big names, such as Louis Vuitton, Adidas, Samsung and Disney. Many others like the UK-based retailers Marks & Spencer and Mothercare are in talks to be a part of the sunrise industry that deals with the buying and selling of products as diverse as mobile phones, fresh vegetables, textiles, exotic food, machinery and personal care products.

"E-commerce has a key role in bolstering China's economic growth and also in increasing domestic consumption. It is a crucial tool for the government as it charts steps to rebalance the economy and ensure sustainable development," says Qi Xiaozhai, dean of the Shanghai Commercial Economic Research Center.

Pointing out the importance of the industry, analysts maintain that it is one of the few industries which has been recording consistently high growth rates over the past few years.

The e-commerce industry has seen growth rates of more than 78 percent since 2006. Unlike the brick and mortar stores, where physical presence is the key driver, e-commerce relies more on faster, cheaper and better consumer experiences and more shopping choices online.

E-commerce sales in the US, the largest market, last year were around $225 billion, accounting for more than 5 percent of the total retail sales in that country, according to data published by the US Census Bureau. In comparison, online retail revenue in China was around $207 billion last year, representing 6 percent of the total retail spending in the country. With the population of Internet users in China slated to grow further this year, and the fact that online shopping penetration still lags behind many developed countries, experts feel that there are rich pickings for foreign companies, provided they are willing to weather the competition from domestic players.

Currently only 41 percent of all the luxury brands present in China have an online presence, and most of those have not been greatly successful in reaching out to consumers. Out of the 564 million who had Internet access in China last year, only 242 million people placed an order online. This is something that should interest the Western companies searching for new markets, experts say.

Expanding presence

While there are no doubts about the vast potential of e-commerce, it is its ability to reach out to customers in remote areas of China, where stores are few and the costs of building a physical retail presence high, that is proving irresistible to Western companies.

According to a study conducted by Taobao.com, China's biggest customer-to-customer electronic trading website, online shopping has played a key role in unlocking the consumption potential of lower-tier urban residents in the country. The research, which surveyed 2,006 Chinese counties last year, indicates that nearly 30 million people from these regions purchased goods with a combined value of 179 billion yuan ($29.2 billion; 22 billion euros), on Taobao, up 87 percent year-on-year. That is a per-capita average of 6,000 yuan, eclipsing the 4,700 yuan spent by shoppers in first and second-tier cities. Small-town customers shopped on Taobao 54 times a year, compared with the 39 purchases made by big-city buyers.

Yiwu, a county-level city in East China's Zhejiang province, took the top spot in overall spending, with online transactions of around 3.4 billion yuan. Consumers from Qingliu County in Fujian province were among the most enthusiastic digital shoppers, devoting 72.6 percent of their disposable income to online vendors on Taobao. In Beijing and Shanghai, the comparable figure was only 27 percent.

Staff of a Taobao shop pack goods to be sent from Yiwu, Zhejiang province, to different parts of China. Lyu Bin / for China Daily