Quality concerns are still a major hurdle for Chinese e-commerce companies

With over 600 million Internet users - nearly twice the entire population of the United States - China is well on its way to becoming the largest e-commerce market in the world.

Record online sales, backed by steady double-digit growth, may soon see China displace the US in terms of online sales. Going by current estimates, the 2-trillion yuan ($327 billion; 246 billion euros) mark in online sales does not seem to be too far way for China.

An example of China's stunning growth in e-commerce is the rise and dominance of Alibaba and its Taobao platform. Set up in 2003, Taobao now controls more than 90 percent of China's consumer-to-consumer market, and delivers 70 percent of the country's 29 million parcels every day. Several international brands such as Adidas, GAP, Disney and Samsung are part of Alibaba's platform, instead of jostling for market share on their own in China. The value of merchandise passing through Alibaba last year alone was equivalent to 2 percent of China's GDP.

Though the global sales of Wal-Mart, the largest US company according to 2013 Fortune 500 ranking, are well over 2 percent of the GDP of the US, it took the company more than 60 years to reach that scale. Alibaba, on the other hand, did it in 10 years.

Compared to the e-commerce sector in other countries, China's e-commerce landscape is unique in many ways, shaped by its turbocharged macroeconomic development and its vast and heterogeneous population that are undergoing deep structural changes.

The consumption platform of e-commerce in China is vastly different from others. In Western countries, most people use computers to conduct online transactions, while mobile platforms are rapidly gaining popularity. In China, however, consumers have largely bypassed PCs. Mobile phones have been their main, and to many the only, shopping and media consumption device. It has been reported that more than 75 percent of China's online population now use a mobile Internet device instead of (or in addition to) a computer.

What Chinese consumers are shopping for online is also different. For example, on Taobao.com, the top five shopping categories are: women's apparel, virtual goods, digital gadgets, domestic goods, and toys and hobby items.

In contrast, US consumers buy much more digital goods, and less clothing or domestic products. In China, digital music and books sales are miniscule. This suggests that assortment decisions, marketing efforts and supply chain management will all look quite different for China's e-commerce sites compared with those from the West.

The shopping behavior of Chinese online consumers is also different from those in other countries. Chinese consumers care much more about price and value, and less about brands (with the exception of foreign brands). They do a lot of comparison-shopping before making a purchase. They tend to be more "social", writing more in micro blogs and posting more pictures compared to Western consumers.

According to a study done by Kantar Media, a UK-based consulting firm, 43 percent of the Internet users in China are also frequent users of social media. Chinese cyber-shoppers are more sensitive to what their friends are buying as well as to what is trending online. In contrast, Western shoppers are less "social", but care about more than just price when shopping. Other factors such as convenience and brand affinity are more important to those shoppers. Western companies focus heavily on brand management and cultivating customer loyalty. Such efforts, however, will be of little use to Chinese companies.

Underlying such online behavior is the structure of China's online population. They are mostly young people with busy work lives. However, this is changing. In 15 years, the median age in China will surpass that of the US.

As China's population continues to age, more older people will be online. E-commerce will undoubtedly evolve as such trends continue. The same is true for China's ongoing urbanization. As it continues, more suburban areas will be connected to the Internet, which will bring more remote and suburban population online. According to a recent report by Taobao, people in small towns are already out-spending people living in first and second-tier cities. This trend will go on as China's technology and transportation infrastructure continues to improve.

China's e-commerce firms have proven to be resilient against foreign competitors, but they are facing unique challenges. Quality of online merchandise is still one of the top concerns. The recent infant formula scandal has significantly changed the landscape of the Chinese domestic dairy industry. Even though the largest impact happened to brick-and-mortar retail stores and their supply chains, e-commerce firms experienced similar shocks. Moreover, such incidents are not a simple matter of switching brands. They can destroy the confidence of consumers, and in turn affect demand as well as supply of a whole industry.

Quality issues could be even more difficult to solve in e-commerce, as buyers and sellers interact virtually. How Chinese e-commerce firms can collectively improve the quality of goods and service sold online remains to be seen.

Another significant issue is the prevalence of counterfeit products in online markets. This has serious long-term consequences if China does not step up its efforts to address the issue. It is also preventing more foreign companies entering the market for fear of losing their intellectual properties and profits to the counterfeiter. This, in turn, stymies market growth and hurts consumers.

If China does not correct this problem, its international reputation as a healthy marketplace will be tarnished, and its long-term competitiveness will suffer. Jack Ma, former Alibaba chairman, has always attributed the success of Taobao to the trust that customers placed in the company and the company on its employees.

Z. Justin Ren is associate professor of operations management at Boston University School of Management. Xin Wang is assistant professor of marketing at the Brandeis University International Business School, Massachusetts.

(China Daily European Weekly 08/16/2013 page9)